CA Inter Costing Question Bank

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CA
INTERMEDIATE
PAPER-3: COST AND MANAGEMENT
ACCOUNTING
COMPILER
Most IMP Collection of Chapterwise
Questions & Answers

CONTENTS
1. INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING .......................... 1-10
2. MATERIAL COST .............................................................................................. 11-56
3. EMPLOYEE COST AND DIRECT EXPENSES .......................................................... 57-90
4. OVERHEADS-ABSORPTION COSTING METHOD ................................................. 91-134
5. ACTIVITY BASED COSTING ............................................................................. 135-180
6. COST SHEET ................................................................................................... 181-221
7. COST ACCOUNTING SYSTEM ........................................................................... 222-260
8. UNIT & BATCH COSTING ............................................................................... 261-270
9. JOB COSTING AND CONTRACT COSTING ........................................................ 271-310
10. PROCESS & OPERATION COSTING ................................................................... 311-364
11. JOINT PRODUCT AND BY PRODUCT .................................................................. 365-384
12. SERVICE COSTING ........................................................................................... 385-422
13. STANDARD COSTING ....................................................................................... 423-462
14. MARGINAL COSTING ....................................................................................... 463-504
15. BUDGET & BUDGETARY CONTROL ................................................................... 505-540
16. MISCELLANEOUS TOPICS ................................................................................ 541-557

CHAPTER-1
INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING
Q-1 Mention the Cost Unit of the following Industries :

(i) Electricity
(ii) Automobile
(iii) Cement
(iv) Steel
(v) Gas
(vi) Brick Making
(vii) Coal Mining
(viii) Engineering
(ix) Professional Services
Ans. Cost Unit of Industries:
S. No. Industry Cost Unit Basis
(i) Electricity Kilowatt-hour (kWh)
(ii) Automobile Number
(iii) Cement Ton/ per bag etc.
(iv) Steel Ton
(v) Gas Cubic feet
(vi) Brick-making 1,000 bricks
(vii) Coal mining Tonne/ton
(viii) Engineering Contract, job
(ix) Professional services Chargeable hour, job, contract
(x) Hospitals Patient day
Q-2 Differentiate between cost control and cost reduction.
Ans. Difference between Cost Control and Cost Reduction
Cost Control Cost Reduction
1. Cost control aims at maintaining the 1. Cost reduction is concerned with reducing costs.
costs in accordance with the It challenges allstandards and end established
eavours to betterthem continuously. standards.
Navkar Digital Institute | Paper 3 : Compiler | Most Imp collection of Chapterwise Que. & Ans. -1-

2. Cost control seeks to attainlowest 2. Cost reduction recognises no conditionas

possible cost underexisting permanent, since a change willresult in lower
conditions. cost.
3. In case of Cost Control,emphasis is 3. In case of cost reduction it is onpresent and
on past andpresent. future.
4. Cost Control is a preventivefunction. 4. Cost reduction is a correctivefunction. It
operates even when anefficient cost control
system exists.
5. Cost control ends when targets 5. Cost reduction has no visible end.
are achieved.
Q-3 Why are cost and management accounting information are required by the staff at operational level?
Describe.
Ans. Operational level staffs- The operational level staffs like supervisors, foreman, team leaders are
requiring information
(i) to know the objectives and performance goals for them
(ii) to know product and service specifications like volume, quality and process etc.
(iii) to know the performance parameters against which their performance is measured and evaluated.
(iv) to know divisional (responsibility centre) profitability etc.
Q-4 Explain: Opportunity Cost
Opportunity Cost - This cost refers to the value of sacrifice made or benefit of opportunity foregone in
accepting an alternative course of action. For example, a firm financing its expansion plan by withdrawing
money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity
cost for carrying out the expansion plan.
Q-5 Mention and explain types of responsibility centres.
Ans. There are four types of responsibility centres:
(i) Cost Centres: The responsibility centre which is held accountable for incurrence of costs which
are under its control. The performance of this responsibility centre is measured against pre-
determined standards or budgets. The cost centres are of two types:
(a) Standard Cost Centre and (b) Discretionary Cost Centre
(ii) Revenue Centres: The responsibility centres which are accountable for generation of revenue for
the entity. Sales Department for example, is the responsible for achievement of sales target and
revenue generation. Though, revenue centres does not have control on the all expenditures it
incurs but some time expenditures related with selling activities like commission to sales person
etc. are incurred by revenue centres.
(iii) Profit Centres: These are the responsibility centres which have both responsibility of generation
of revenue and incurrence of expenditures. Since, managers of profit centres are accountable for
both costs as well as revenue, profitability is the basis for measurement of performance of these
responsibility centres. Examples of profit centres are decentralised branches of an organisation.
(iv) Investment Centres: These are the responsibility centres which are not only responsible for
profitability but also has the authority to make capital investment decisions. The performance of
these responsibility centres is measured based on Return on Investment (ROI) besides profit.
-2- Chapter-1 : Introduction to Cost & Management Accounting

Q-6 Explain the difference between controllable & uncontrollable costs?

Ans. Controllable costs and Uncontrollable costs : Cost that can be controlled, typically by a cost, profit or
investment centre manager is called controllable cost. Controllable costs inc urred in a particular
responsibility centre can be influenced by the action of the executive heading that responsibility
centre.
Costs which cannot be influenced by the action of a specified member of an undertaking are known as
uncontrollable costs.
Q-7 Discuss the impact of Information Technology in Cost Accounting.
Ans. The impact of IT in cost accounting may include the followings:
(i) After the introduction of ERPs, different functional activities get integrated and as a consequence a
single entry into the accounting system provides custom made reports for every purpose and saves
an organisation from preparing different sets of documents.
Reconciliation process of results of both cost and financial accounting systems become simpler and
less sophisticated.
(ii) A move towards paperless environment can be seen where documents like Bill of Material, Material
Requisition Note, Goods Received Note, labour utilisation report etc. are no longer required to be
prepared in multiple copies, the related department can get e -copy from the system.
(iii) Information T echnology with the help of internet (including intranet and extranet) helps in resource
procurement and mobilisation. For example, production department can get materials from the
stores without issuing material requisition note physically. Similarly, purchase orders can be initiated
to the suppliers with the help of extranet. This enables an entity to shift towards Just-in-T ime (JIT)
approach of inventory management and production.
(iv) Cost information for a cost centre or cost object is ascertained with accuracy in timely manner. Each
cost centre and cost object is codified and all related costs are assigned to the cost object or cost
centre. This process automates the cost accumulation and ascertainment process. The cost
information can be customised as per the requirement. For example, when an entity manufacture
or provide services, it can know information job -wise, batch-wise, process-wise, cost centre wise
etc.
(v) Uniformity in preparation of report, budgets and standards can be achieved with the help of IT . ERP
software plays an important role in bringing uniformity irrespective of location, currency, language
and regulations.
(vi) Cost and revenue variance reports are generated in real time basis which enables the management
to take control measures immediately.
(vii) IT enables an entity to monitor and analyse each process of manufacturing or service activity closely
to eliminate non value added activities.
The above are examples of few areas where Cost Accounting is done with the help of IT .
Q-8 Discuss cost classification based on variability.
Ans. Cost classification based on variability
(i) Fixed Costs – These are the costs which are incurred for a period, and which, within certain output
and turnover limits, tend to be unaffected by fluctuations in the levels of activity (output or
turnover). They do not tend to increase or decrease with the changes in output.
For example, rent, insurance of factory building etc., remain the same for different levels of
production.

(ii) Variable Costs – These costs tend to vary with the volume of activity. Any in crease in the activity
results in an increase in the variable cost and vice -versa. For example, cost of direct labour, etc.
(iii) Semi-variable Costs – These costs contain both fixed and variable components and are thus
partly affected by fluctuations i n the level of activity. Examples of semi variable costs are telephone
bills, gas and electricity etc.
Q-9 Discuss the four different methods of costing alongwith their applicability to concerned industry?
Ans. Four different methods of costing along with their applicability to concerned industry have been
discussed as below:
(i) Job Costing: The objective under this method of costing is to ascertain the cost of each job order.
A job card is prepared for each job to accumulate costs. The cost of the job is determined by
adding all costs against the job it has incurred. This method of costing is used in printing press,
foundries and general engineering workshops, advertising etc.
(ii) Batch Costing: This system of costing is used where small components/ parts of the same kind are
required to be manufactured in large quantities. Here batch of sim ilar products is treated as a job
and cost of such a job is ascertained as discussed under (1), above. If in a cycle manufacturing unit,
rims are produced in batches of 2,500 units each, then the cost will be determined in relation to a
batch of 2,500 units.
(iii) Contract Costing: If a job is very big and takes a long time for its completion, then method used for
costing is known as Contract Costing. Here the cost of each contract is ascertained separately. It is
suitable for firms engaged in the construct ion of bridges, roads, buildings etc.
(iv) Operating Costing: The method of Costing used in service rendering undertakings is known as
operating costing. This method of costing is used in undertakings like transport, supply of water,
telephone services, hospitals, nursing homes etc.
Q-10 Discuss the prerequisite of installing cost accounting system.
Ans. Before setting up a system of cost accounting the un der mentioned factors should be studied:
(i) Objective: The objective of costing system , for example whether it is being introduced for fixing
prices or for insisting a system of cost control.
(ii) Nature of Business or Industry: The Industry in which business is operating. Every business industry
has its own peculiar ity and objectives. According to its cost information requirement cost
accounting methods are followed. For example, an oil refinery maintains process wise cost
accounts to find out cost incurred on a particular process say in crude refinement process etc.
(iii) Organisational Hierarchy: Costing system should fulfil the information requirement s of different
levels of management. Top management is concerned with the corporate strategy, strategic level
management is concerned with marketing strategy, product diversification, product pricing etc.
Operational level management needs the information on standard quantity to be consumed,
report on idle time etc.
(iv) Knowing the product: Nature of product determines the type of costing system to be implemented.
The product which has by -products requires costing system which account for by-products as
well. In case of perishable or short self - life, marginal costing method is required to know the
contribution and minimum price at which it can be sold.
(v) Knowing the production process: A good costing system can never be established without the
complete knowledge of the production process. Cost apportionment can be done on the most
appropriate and scientific basis if a cost accountant can identify degree of effort or resources
consumed in a particular process. This also includes some basic technical know -how and process
peculiarity.
(vi) Information synchronisation: Establishment of a department or a system requires substantial
amount of organisational resources. While drafting a costing s ystem, information needs of various

other departments should be taken into account. For example, in a typical business organisation
accounts department needs to submit monthly stock statement to its lender bank, quantity wise
stock details at the time of filing returns to tax authorities etc.
(vii) Method of maintenance of cost records: The manner in which Cost and Financial accounts could
be inter-locked into a single integral accounting system and how the results of separate sets of
accounts i.e. cost and financial, could be reconciled by means of control accounts.
(viii) Statutory compliances and audit: Records are to be maintained to comply with statutory
requirements and applicable cost accounting standards to be followed .
(ix) Information Attributes: Information generated from the Costing system should possess all the
att ributes of information i.e. complete, accurate, timeliness, relevant etc. to have an effective
management information system (MIS).
Q-11 Discuss the essential features of a good cost accounting system.
Ans. The essential features, which a good cost and management accounting system should possess, are as
follows:
(i) Informative and simple: Cost and management accounting system should be tailor-made, practical,
simple and capable of meeting the requirements of a business concern. The system of costing
should not sacrifice the utility by introducing meticulous and unnecessary details.
(ii) Accurate and authentic: The data to be used by the cost and management accounting system
should be accurate and authenticated; otherwise it may distort the output of the system and a
wrong decision may be taken.
(iii) Uniformity and consistency: There should be uniformity and consistency in classification, treatment
and reporting of cost data and related information. This is required for benchmarking and
comparability of the results of the system for both horizontal and vertical analysis.
(iv) Integrated and inclusive: The cost and management accounting system should be integrated with
other systems like financial accounting, taxation, statistics and operational research etc. to have
a complete overview and clarity in results.
(v) Flexible and adaptive: The cost and management accounting system should be flexible enough to
make necessary amendments and modification in the system to incorporate changes in
technological, reporting, regulatory and other requirements.
(vi) Trust on the system: Management should have trust on the system and its output. For this, an
active role of management is required for the development of such a system that reflects a strong
conviction in using information for decision making.
Q-12 State the limitations of cost and management accounting.
Ans. Like other branches of accounting, cost and management accounting is also having certain limitations.
The limitations of cost and management accounting are as follows:
1. Expensive: It is expensive because analysis, allocation and absorption of overheads require
considerable amount of additional work, and hence additional money.
2. Requirement of Reconciliation: The results shown by cost accounts differ from those shown by
financial accounts. Thus Preparation of reconciliation statements is necessary to verify their
accuracy.
3. Duplication of Work: It involves duplication of work as organization has to maintain two sets of
accounts i.e. Financial Account and Cost Account.
4. Inefficiency: Costing system itself does not control costs but its usage does.

Q-13 Explain the difference between Cost Accounting and Management Accounting
Ans. Difference between Cost Accounting and Management Accounting

Basis Cost Accounting Management Accounting
(i) Nature It records the quantitative It records both qualitative andquantitative
aspect only. aspect.
(ii) Objective It records the cost of It Provides information tomanagement for
producing a product and planning andco-ordination.
providing a service.
(iii) Area It only deals with cost It is wider in scope as it includesfinancial
Ascertainment. accounting, budgeting,taxation, planning
etc.
(iv) Recording ofdata It uses both past and present It is focused with the projectionof figures
figures. for future.
(v) Development Its development is related to It develops in accordance to theneed of
industrial revolution. modern business world.
(vi) Rules andQ It follows certain principles It does not follow any specific rules and
Regulation and procedures for recording regulations.
costs of different products.
Q-14 DISCUSS cost classification based on variability and controllability.
turnover). They do not tend to increase or decrease with the changes in output. For example, rent,
insurance of factory building etc., remain the same for different levels of production.
(ii) Variable Costs – These costs tend to vary with the volume of activity. Any increase in the activity
results in an increase in the variable cost and vice-versa.
For example, cost of direct labour, etc.
(iii) Semi-variable Costs – These costs contain both fixed and variable components and are thus partly
affected by fluctuations in the level of activity. Examples of semi variable costs are telephone
Cost classification based on controllability
(i) Controllable Costs - Cost that can be controlled, typically by a cost, profit or investment centre
manager is called controllable cost. Controllable costs incurred in a particular responsibility centre
can be influenced by the action of the executive heading that responsibility centre. For example,
direct costs comprising direct labour, direct material, direct expenses and some of the overheads
are generally controllable by the shop level management.
(ii) Uncontrollable Costs - Costs which cannot be influenced by the action of a specified member of an
undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the
tool room is controllable by the foreman in-charge of that section but the share of the tool-room
expenditure which is apportioned to a machine shop is not to be controlled by the machine shop
foreman.

Q-15 HOW do you deal with the following in cost accounts?

(i) Fringe benefits
(ii) Bad debts.
Ans.(i) Fringe benefits: These are the additional payments or facilities provided to the workers apart from
their salary and direct cost-allowances like house rent, dearness and city compensatory allowances.
These benefits are given in the form of over time, extra shift duty allowance, holiday pay, pension
facilities etc.
These indirect benefits stand to improve the morale, loyalty and stability of employees towards the
organisation. If the amount of fringe benefit is considerably large, it may be recovered as direct charge
by means of a supplementary wage or labour rate; otherwise, these may be collected as part of
production overheads.
(ii) Bad debts: There is no unanimity among different authors of Cost Accounting about the treatment of
bad debts. One view is that ‘bad debts’ should be excluded from cost. According to this view bad debts
are financial losses and therefore, they should not be included in the cost of a particular job or product.
According to another view it should form part of selling and distribution overheads, especially when
they arise in the normal course of trading. Therefore, bad debts should be treated in cost accounting in
the same way as any other selling and distribution cost. However extra ordinarily large bad debts
should not be included in cost accounts.
Q-16 State the method of costing that would be most suitable for:
(i) Oil Refinery
(ii) Interior Decoration
(iii) Airlines Company
(iv) Advertising
(v) Car Assembly
Ans. Method of Costing
S.No. Industry Method of Costing
(i) Oil Refinery Process Costing
(ii) Interior Decoration Job Costing
(iii) Airlines Company Operation/ Service Costing
(iv) Advertising Job Costing
(v) Car Assembly Multiple Costing
Q-17 Give any five examples of the impact of use of Information Technology in Cost Accounting.
Ans. Example of Impact of Information Technology in cost accounting may include the following:
(i) After the introduction of ERPs, different functional activities get integrated and as a consequence
a single entry into the accounting system provides custom made reports for every purpose and
saves an organisation from preparing different sets of documents. Reconciliation process of results
of both cost and financial accounting systems become simpler and less sophisticated.
prepared in multiple copies, the related department can get e-copy from the system.

(iii) Information Technology with the help of internet (including intranet and extranet) helping in
resource procurement and mobilisation. For example, production department can get materials
from the stores without issuing material requisition note physically. Similarly, purchase orders can
be initiated to the suppliers with the help of extranet. This enables an entity to shift towards Just-
in-Time (JIT) approach of inventory management and production.
cost centre and cost object is codified and all related costs are assigned to the cost objects or cost
centres using assigned codes. This automates the cost accumulation and ascertainment process.
The cost information can be customised as per the requirement. For example, when an entity
manufacture or provide services, are able to know information job-wise, batch-wise, process-
wise, cost centre wise etc.
(v) Uniformity in preparation of report, budgets and standards can be achieved with the help of IT.
ERP software plays an important role in bringing uniformity irrespective of location, currency,
language and regulations.
(vii) IT enables an entity to monitor and analyse each process of manufacturing or service activity
closely to eliminate non value added activities.
Q-18 State the Method of Costing to be used in the following industries:
(i) Real Estate
(ii) Motor repairing workshop
(iii) Chemical Industry
(iv) Transport service
(v) Assembly of bicycles
(vi) Biscuits manufacturing Industry
(vii) Power supply Companies
(viii) Car manufacturing Industry
(ix) Cement Industry
(x) Printing Press
Ans. Method of costing used in different industries:
S. No. Industries Method of Costing
(i) Real Estate Contract Costing
(ii) Motor Repairing Workshop Job Costing
(iii) Chemical Industry Process Costing
(iv) Transport Service Service/Operating Costing
(v) Assembly of Bicycles Unit/ Single/Output/Multiple Costing
(vi) Biscuits Manufacturing Industry Batch Costing
(vii) Power Supply Companies Service/Operating Costing
(viii) Car Manufacturing Industry Multiple Costing
(ix) Cement Industry Unit/Single/Output Costing
(x) Printing Press Job Costing

Q-19 Differentiate between “Marginal and Absorption Costing”.

Ans. Difference between Marginal costing and Absorption costing
S.No. Marginal costing Absorption costing
1. Only variable costs are considered Both fixed and variable costs are
for product costing and inventory considered for product costing and
valuation. inventory valuation.
2. Fixed costs are regarded as period Fixed costs are charged to the cost of
costs. The Profitability of different production. Each product bears a
products is judged by their P/V reasonable share of fixed cost and thus
ratio. the profitability of a product is influenced
by the apportionment of fixed costs.
3. Cost data presented highlight the Cost data are presented in conventional
total contribution of each product. pattern. Net profit of each product is
determined after subtracting fixed cost
along with their variable costs.
4. The difference in the magnitude of The difference in the magnitude of
opening stock and closing stock opening stock and closing stock affects
does not affect the unit cost of the unit cost of production due to the
production. impact of related fixed cost.
5. In case of marginal costing the cost In case of absorption costing the cost per
per unit remains the same, unit reduces, as the production
irrespective of the production as it increases as it is fixed cost which
is valued at variable cost reduces, whereas, the variable cost
remains the same per unit.
Q-20 ‘Like other branches of accounting, cost accounting also has certain limitations’. EXPLAIN the limitations.
Ans. “Like other branches of accounting, cost accounting also has certain limitations”. The limitations of cost
accounting are as follows:
(i) Expensive: It is expensive because analysis, allocation and absorption of overheads requires
considerable amount of additional work, and hence additional money.
(ii) Requirement of reconciliation: The results shown by cost accounts differ from those shown by
financial accounts. Thus, preparation of reconciliation statements is necessary to verify their
accuracy.
(iii) Duplication of work: It involves duplication of work as organization has to maintain two sets of
accounts i.e. Financial Accounts and Cost Accounts.
Q-21 Discuss cost classification based on variability and controllability.
turnover). They do not tend to increase or decrease with the changes in output. For example, rent,
insurance of factory building etc., remain the same for different levels of production.

(ii) Variable Costs – These costs tend to vary with the volume of activity. Any increase in the activity
results in an increase in the variable cost and vice-versa.
For example, cost of direct labour, etc.
(iii) Semi-variable Costs – These costs contain both fixed and variable components and are thus partly

(i) Controllable Costs - Cost that can be controlled, typically by a cost, profit or investment centre
manager is called controllable cost. Controllable costs incurred in a particular responsibility centre
can be influenced by the action of the executive heading that responsibility centre. For example,
direct costs comprising direct labour, direct material, direct expenses and some of the overheads
are generally controllable by the shop level management.
undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the
tool room is controllable by the foreman in-charge of that section but the share of the tool -room
expenditure which is apportioned to a machine shop is not to be controlled by the machine shop
foreman.
---0---0---

CHAPTER-2
MATERIAL COST
Q-1 Arnav Electronics manufactures electronic home appliances. It follows weighted average Cost method
for inventory valuation. Following are the data of component X:
Date Particulars Units Rate per
unit (`)
15-12-19 Purchase Order- 008 10,000 9,930
30-12-19 Purchase Order- 009 10,000 9,780
01-01-20 Opening stock 3,500 9,810
05-01-20 GRN*-008 (against the Purchase Order- 008) 10,000 -
05-01-20 MRN**-003 (against the Purchase Order- 008) 500 -
06-01-20 Material Requisition-011 3,000 -
07-01-20 Purchase Order- 010 10,000 9,750
12-01-20 GRN-009 (against the Purchase Order- 009) 10,000 -
12-01-20 MRN-004 (against the Purchase Order- 009) 400 -
25-01-20 GRN-010 (against the Purchase Order- 010) 10,000 -
*GRN- Goods Received Note; **MRN- Material Returned Note Based on the above data, you are required
to CALCULATE:
(i) Re-order level
(ii) Maximum stock level
(iii) Minimum stock level
(iv) PREPARE Store Ledger for the period January 2020 and DETERMINE the value of stock as on 31-01-
2020.
(v) Value of components used during the month of January, 2020.
(vi) Inventory turnover ratio.

Ans. Workings:
Consumption is calculated on the basis of material requisitions:
Maximum component usage = 4,500 units (Material requisition on 10-01-20)
Minimum component usage = 1,500 units (Material requisition on 24-01-20)
Lead time is calculated from purchase order date to material received date
Maximum lead time = 21 days (15-12-2019 to 05-01-2020)
Minimum lead time = 14 days (30-12-2019 to 12-01-2020)
Calculations:
(i) Re-order level
= Maximum usage × Maximum lead time
= 4,500 units × 21 days = 94,500 units
(ii) Maximum stock level
= Re-order level + Re-order Quantity – (Min. Usage × Min. lead time)
= 94,500 units + 10,000 units – (1,500 units × 14 days)
= 1,04,500 units – 21,000 units = 83,500 units
(iii) Minimum stock level
= Re-order level – (Avg. consumption × Avg. lead time)
= 94,500 units – (3,000 units × 17.5 days)
= 94,500 units – 52,500 units
= 42,000 units
(iv) Store Ledger for the month of January 2020:
Date Receipts Issue Balance
GRN/ Units Rate Amt. MRN/ Units Rate Amt. Units Rate Amt.
MRN ` (` ‘000) MR ` (` ‘000) ` (` ‘000)
01-01-20 - - - - - - - - 3,500 9,810 34,335
05-01-20 008 10,000 9,930 99,300 003 500 9,930 4,965 13,000 9,898 1,28,670
06-01-20 - - - - 011 3,000 9,898 29,694 10,000 9,898 98,980
10-01-20 - - - - 012 4,500 9,898 44,541 5,500 9,898 54,439
12-01-20 009 10,000 9,780 97,800 004 400 9,780 3,912 15,100 9,823 1,48,327
15-01-20 - - - - 013 2,200 9,823 21,611 12,900 9,823 1,26,716
24-01-20 - - - - 014 1,500 9,823 14,734 11,400 9,823 1,11,982
25-01-20 010 10,000 9,750 97,500 - - - - 21,400 9,789 2,09,482
28-01-20 - - - - 015 4,000 9,789 39,156 17,400 9,789 1,70,326
31-01-20 - - - - 016 3,200 9,789 31,325 14,200 9,789 1,39,001
Note: Decimal figures may be rounded-off to the nearest rupee value wherever required)
Value of stock as on 31-01-2020 (` 000) = ` 1,39,001
(v) Value of components used during the month of January 2020:
Sum of material requisitions 011 to 016 (‘000)
= ` 29,694 + ` 44,541 + ` 21,611 + ` 14,734 + ` 39,156 + ` 31,325 = ` 1,81,061
-12- Chapter-2 : Material Cost

(vi) Inventory Turnover Ratio

Value of materials used
=
Average stock value
` 1,81,061 ` 1,81,061
= ` 1,3,001 + 34,335 /2 = ` 86,668 = 2.09
Q-2 HBL Limited produces product ‘M’ which has a quarterly demand of 20,000 units. Each product requires
3 kg. and 4 kg. of material X and Y respectively. Material X is supplied by a local supplier and can be
procured at factory stores at any time, hence, no need to keep inventory for material X. The material Y
is not locally available, it requires to be purchased from other states in a specially designed truck
container with a capacity of 10 tons.
The cost and other information related with the materials are as follows:
Particulars Material –X Material-Y
Purchase price per kg. (excluding GST) `140 `640
Rate of GST 18% 18%
Freight per trip (fixed, irrespective of quantity) - ` 28,000
Loss of materials in transit* - 2%
Loss in process* 4% 5%
*On purchased quantity
Other information:
- The company has to pay 15% p.a. to bank for cash credit facility.
- Input credit is available on GST paid on materials.
Required:
(i) CALCULATE cost per kg. of material X and Y
(ii) CALCULATE the Economic Order quantity for both the materials.
Ans. Working Notes:(a) Annual purchase quantity for material X and Y:
Annual demand for product M- 20,000 units × 4 = 80,000 units
Particulars Mat-X Mat-Y
Quantity required for per unit of product M 3 kg. 4 kg.
Net quantity for materials required 2,40,000 kg. 3,20,000 kg.
Add: Loss in transit - 6,881 kg.
Add: Loss in process 10,000 kg. 17,204 kg
Purchase quantity 2,50,000 kg. 3,44,085 kg
Note - Input credit on GST paid is available; hence, it will not be included in cost of material.
(i) Calculation of cost per kg. of material X and Y:
Purchase quantity 2,50,000 kg. 3,44,085 kg.
Rate per kg. `140 `640
Purchase price `3,50,00,000 `22,02,14,400
Add: Freight 0 ` 9,80,000*
Total cost `3,50,00,000 `22,11,94,400
Net Quantity 2,40,000 kg. 3,20,000 kg
Cost per kg. ` 145.83 ` 691.23

3,44,085kg
*No. of trucks = = 34.40 trucks or 35 trucks
10 ton × 1,000
Therefore, total freight = 35 trucks × ` 28,000 = ` 9,80,000
(ii) Calculation of Economic Order Quantity (EOQ) for Mat.-X and Y:
2 × Annual Requirement Order cost

EOQ =
Carrying cost per unit p.a
Annual Requirement 2,50,000 kg. 3,44,085 kg.
Ordering cost 0 ` 28,000
Cost per unit ` 145.83 ` 691.23
Carrying cost 15% 15%
Carrying cost per unit p.a. 0* ` 103.68
EOQ 0 13,632.62 kg.
Q-3 Ananya Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of Dee
is required. As per the sales forecast conducted by the company, it will able to sale 10,000 units of Exe
in the coming year. The following is the information regarding the raw material Dee:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per day.
(iii) There is an opening stock of 1,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
There is an opening stock of 900 units of the finished product Exe.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur ` 720 on paper and documentation work.
From the above information FIND OUT the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) CALCULATE the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]
Ans. Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:
Sales forecast of the product ‘Exe’ 10,000 units
Less: Opening stock of ‘Exe’ 900 units
Fresh units of ‘Exe’ to be produced 9,100 units
Raw material required to produce 9,100 units of ‘Exe’
(9,100 units × 2 kg.) 18,200 kg.
Less: Opening Stock of ‘Dee’ 1,000 kg.
Annual demand for raw material ‘Dee’ 17,200 kg.

(ii) Computation of Economic Order Quantity (EOQ):

2 x Annual demand of 'Dee'  Orderingcost
EOQ =
Carrying cost per unit per annum
2 x 17,200 kg.  ` 720 2 x 17,200 kg.  ` 720

= = = 1,200 kg.
`125  13.76% `17.2
(iii) Re- Order level:
= (Maximum consumption per day × Maximum lead time)
 Annual Consumption of 'Dee' 
=  + 20 kg.   8 days
 364 days 
 18,200 kg.  
=  364 days + 20 kg.   8 days  = 560 kg.
  
(iv) Minimum consumption per day of raw material ‘Dee’:
Average Consumption per day = 50 Kg.
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg.
So Minimum consumption per day will be
Min.consumption Max.consumption
Average Consumption =
2
Min.consumption + 70 kg.
Or, 50 kg. =
2
Or, Min. consumption = 100 kg – 70 kg. = 30 kg.
(a) Re-order Quantity :
EOQ – 200 kg. = 1,200 kg. – 200 kg. = 1,000 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time)
= 560 kg. + 1,000 kg. – (30 kg. × 4 days)
= 1,560 kg. – 120 kg. = 1,440 kg.
(c) Minimum Stock level:
= Re-order level – (Average consumption per day × Average lead time)
= 560 kg. – (50 kg. × 6 days) = 260 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order quantity 1,000 kg. 1,200 kg.
17,200 kg. 17,200 kg.
II No. of orders a year = 17.2 or 18 orders = 14.33 or 15orders
1,000 kg. 1,200 kg.
III Ordering Cost 18 orders × ` 720 = `12,960 15 orders × ` 720 = `10,800
1,000 kg. 1,200 kg.
IV Average Inventory = 500kg. = 600kg.
2 2
V Carrying Cost 500 kg. × ` 17.2 = ` 8,600 600 kg. × ` 17.2 = ` 10,320
VI Total Cost ` 21,560 ` 21,120
Extra Cost incurred due to not ordering EOQ = ` 21,560 - ` 21,120 = `440

Q-4 Define Inventory Control and give its objectives.

List down the basis to be adopted for Inventory Control.
Ans. Inventory Control: The Chartered Institute of Management Accountants (CIMA) defines Inventory
Control as “The function of ensuring that sufficient goods are retained in stock to meet all requirements
without carrying unnecessarily large stocks.”
The objective of inventory control is to make a balance between sufficient stock and over - stock. The
stock maintained should be sufficient to meet the production requirements so that uninterrupted
production flow can be maintained. Insufficient stock not only pause the production but also cause a
loss of revenue and goodwill. On the other hand, Inventory requires some funds for purchase, storage,
maintenance of materials with a risk of obsolescence, pilferage etc. A trade-off between Stock-out and
Over-stocking is required. The management may employ various methods of Inventory control to have
a balance. Management may adopt the following basis for Inventory control:
Inventory Control
By Setting On the basis Using Ratio Physical Control

Quantitative of Relative Analysis
Classification
Q-5 Rounak Ltd. is the manufacturer of monitors for PCs. A monitor requires 4 units of Part-M. The following
are the details of its operation during 20X8:
Average monthly market demand 2,000 Monitors
Ordering cost ` 1,000 per order
Inventory carrying cost 20% per annum
Cost of Part ` 350 per part
Normal usage 425 parts per week
Minimum usage 140 parts per week
Maximum usage 710 parts per week
Lead time to supply 3-5 weeks
COMPUTE from the above:
(i) Economic Order Quantity (EOQ). If the supplier is willing to supply quarterly 30,000 units of Part-
M at a discount of 5%, is it worth accepting?
(ii) Reorder level
(iii) Maximum level of stock
(iv) Minimum level of stock.
Ans.
(1) A = Annual usage of parts = Monthly demand for monitors × 4 parts × 12 months
= 2,000monitors × 4 parts × 12 months = 96,000 units
O = Ordering cost per order = ` 1,000/- per order
C1 = Cost per part =` 350/-

iC1 = Inventory carrying cost per unit per annum

= 20% × ` 350 = ` 70/- per unit, per annum
Economic order quantity (EOQ):
2AO 2  96,000 units  `1,000

E.O.Q = =
iC1 `70
= 1,656 parts (approx.)
The supplier is willing to supply 30,000 units at a discount of 5%, therefore cost of each part shall be
`350 – 5% of 350 = `332.5
Total cost (when order size is 30,000 units):
= Cost of 96,000 units + Ordering cost + Carrying cost.
 96,000 units  1
= (96,000 units × ` 332.50) +  × `1, 000  + (30,000 units × 20% × ` 332.50)
 30,000 units  2
= `3,19,20,000 + `3,200* + `9,97,500= `3,29,20,700
Total cost (when order size is 1,656 units):
 96,000 units  1
= (96,000 units × `350) +  × `1, 000  + (1,656 units × 20% × `350)
 1,656 units  2
= `3,36,00,000 + `57,970* + `57,960 = `3,37,15,930
Since, the total cost under the supply of 30,000 units with 5% discount is lower than that when order
size is 1,656 units, therefore the offer should be accepted.
Note: While accepting this offer consideration of capital blocked on order size of 30,000 units has been
ignored.
*Order size can also be taken in absolute figure.
(2) Reorder level
= Maximum consumption × Maximum re-order period
= 710 units × 5 weeks = 3,550 units
(3) Maximum level of stock
= Re-order level + Reorder quantity – (Min. usage × Min. reorder period)
= 3,550 units + 1,656 units – (140 units × 3 weeks) = 4,786 units.
(4) Minimum level of stock
= Re-order level – Normal usage × Average reorder period
= 3,550 units – (425 units × 4 weeks) = 1,850 units.
Q-6 Aditya Brothers supplies surgical gloves to nursing homes and polyclinics in the city. These surgical
gloves are sold in pack of 10 pairs at price of ` 250 per pack.
For the month of April 2018, it has been anticipated that a demand for 60,000 packs of surgical gloves
will arise. Aditya Brothers purchases these gloves from the manufacturer at ` 228 per pack within a 4 to
6 days lead time. The ordering and related cost is ` 240 per order. The storage cost is 10% p.a. of average
inventory investment.

Required:
(i) CALCULATE the Economic Order Quantity (EOQ)
(ii) CALCULATE the number of orders needed every year
(iii) CALCULATE the total cost of ordering and storage of the surgical gloves.
(iv) DETERMINE when should the next order to be placed. (Assuming that the company does maintain
a safety stock and that the present inventory level is 10,033 packs with a year of 360 working days).
Ans.
(i) Calculation of Economic Order Quantity:
2A O 2 × (60,000 packs x 12 months) x `240

EOQ =
Ci `228 x 10%
= 3,893.3 packs or 3,893 packs.
(ii) Number of orders per year
Annual requirements
Annual requirements 7,20,000 packs
= = 184.9or185orders a year
E.O.Q. 3,893 packs
(iii) Ordering and storage costs

(` )
Ordering costs :– 185 orders x ` 240 44,400.00
Storage cost :– ½ (3,893 packs x 10% of `228) 44,380.20
Total cost of ordering & storage 88,780.20
(iv) Timing of next order
(a) Day’s requirement served by each order.
No.of working days 360 days
Number of day requirements = = = 1.94 days supply..
No.of order in a year 185 orders
This implies that each order of 3,893 packs supplies for requirements of 1.94 days only.
(b) Days requirement covered by inventory
= Units in inventory x (Day’s requirement served by an order)
Economic order quantity
10,033 packs
 3,893 packs x 1.94 days = 5 days requirement
(c) Time interval for placing next order

Inventory left for day’s requirement – Average lead time of delivery
5 days – 5 days = 0 days
This means that next order for the replenishment of supplies has to be placed immediately.
Q-7 Surekha Limited Produces 4000 Litres of paints on a quarterly basis. Each Litre requires 2 kg of raw
material. The cost of placing one order for raw material is ` 40 and the purchasing price of raw material
is ` 50 per kg. The storage cost and interest cost is 2% and 6% per annum respectively. The lead time for
procurement of raw material is 15 days.
Calculate Economic Order Quantity and Total Annual Inventory Cost in respect of the above raw material.

Ans. Working:
Calculation of Annual demand of raw material
= 4,000 Litres (per quarter) x 4 (No. of Quarter in a year) x 2 kg. (raw material required for each Litre of
paint)
= 32,000 kg.
Calculation of Carrying cost
Storage rate = 2%
Interest Rate = 6%
Total = 8% per annum
Carrying cost per unit per annum = 8% of ` 50 = ` 4 per unit per annum
2 × Annual demand (A)× Ordering Cost per order(O)

(i) EOQ =
Carrying cost per unit per annum (C)
2× 32,000kg × ` 40
= = 800 Kg
`4
(ii) Total Annual Inventory Cost
Purchasing cost of 32,000 kg @ ` 50 per kg = ` 16,00,000
 32,000kg 
Ordering Cost  × ` 40  = ` 1,600
 800kg 
 15 days 
Carrying Cost of Inventory  × 800 Kg × ` 40  = ` 1,600
 30 days 
` 16,03,200
Q-8 The following are the details of receipt and issue of material ‘CXE’ in a manufacturing Co. during the
month of April 2019:
Date Particulars Quantity (kg) Rate per kg
April 4 Purchase 3,000 ` 16
April8 Issue 1,000
April15 Purchase 1,500 ` 18
April 20 Issue 1,200
April 25 Return to supplier out of purchase made on April 15 300
April 26 Issue 1,000
April 28 Purchase 500 ` 17
Opening stock as on 01-04-2019 is 1,000 kg @ ` 15 per kg.
On 30th April, 2019 it was found that 50 kg of material ‘CXE’ was fraudulently misappropriated by the
store assistant and never recovered by the Company.
Required:
(i) Prepare a store ledger account under each of the following method of pricing the issue:
(a) Weighted Average Method (b) LIFO
(ii) What would be the value of material consumed and value of closing stock as on 30-04-2019 as per
these two methods?

Ans.
(i) (a) Stores Ledger Account for the month of April, 2019 (Weighted Average Method)
Receipt Issue Balance
Date Qty Units Rate Amount Qty Units Rate Amount Qty Units Rate Amount
(` ) (` ) (` ) (` ) (` ) (` )
1-4-19 _ _ _ _ _ _ 1,000 15.00 15,000
4-4-19 3,000 16.00 48,000 _ _ _ 4,000 15.75 63,000
8-4-19 _ _ _ 1,000 15.75 15,750 3,000 15.75 47,250
15-4-19 1,500 18.00 27,000 _ _ _ 4,500 16.50 74,250
20-4-19 _ _ _ 1,200 16.50 19,800 3,300 16.50 54,450
25-4-19 _ _ _ 300 18.00 5,400 3,000 16.35 49,050
26-4-19 _ _ _ 1,000 16.35 16,350 2,000 16.35 32,700
28-4-19 500 17.00 8,500 _ _ _ 2,500 16.48 41,200
30-4-19 _ _ _ 50 16.48 824 2,450 16.48 40,376
(b) Stores Ledger Account for the month of April, 2019 (LIFO)
Date Qty Units Rate Amount Qty Units Rate Amount Qty Units Rate Amount
(` ) (` ) (` ) (` ) (` ) (` )
1-4-19 _ _ _ _ _ _ 1,000 15 15,000
4-4-19 3,000 16 48,000 _ _ _ 1,000 15 15000
3,000 16 48,000
8-4-19 _ _ _ 1,000 16 16,000 1,000 15 15,000
2,000 16 32,000
15-4-19 1,500 18 27,000 _ _ _ 1,000 15 15,000
2,000 16 32,000
1,500 18 27,000
20-4-19 _ _ _ 1,200 18 21,600 1,000 15 15,000
2,000 16 32,000
300 18 5,400
25-4-19 _ _ _ 300 18 5,400 1,000 15 15,000
2,000 16 32,000
26-4-19 _ _ _ 1,000 16 16,000 1,000 15 15,000
1,000 16 16,000
28-4-19 500 17 8,500 _ _ _ 1,000 15 15,000
1,000 16 16,000
500 17 8,500
30-4-19 _ _ _ 50 17 850 1,000 15 15,000
1,000 16 16,000
450 17 7,650
(ii) Value of Material Consumed and Closing Stock
Weighted Average LIFO
method (`) method(`)
Opening stock as on 01-04-2019 15,000 15,000
Add: Purchases 83,500 83,500
98,500 98,500
Less: Return to supplier 5,400 5,400
Less: Abnormal loss 824 850
Less: Closing Stock as on 30-04-2019 40,376 38,650
Value of Material Consumed 51,900 53,600

Q-9 M/s. X Private Limited is manufacturing a special product which requires a component "SKY BLUE". The
following particulars are available for the year ended 31st March, 2018:
Annual demand of "SKY BLUE" 12000 Units
Cost of placing an order ` 1,800
Cost per unit of "SKY BLUE” ` 640
Carrying cost per annum 18.75%
The company has been offered a quantity discount of 5 on the purchases of "SKY BLUE" provided the
order size is 3000 components at a time.
You are required to:
(i) Compute the Economic Order Quantity.
(ii) Advise whether the quantity discount offer can be accepted.
Ans. (i) Calculation of Economic Order Quantity
2AO 2 x 12,000 units x ` 1,800

EOQ = = = 600 units
C ` 640 x 18.75 / 100
(ii) Evaluation of Profitability of Different Options of Order Quantity
When EOQ is ordered
(`)
Purchase Cost (12,000 units x ` 640) 76,80,000
A
Ordering Cost [ × O - (12,000 units/ 600 units) x ` 1,800] 36,000
Q
Q
Carrying Cost ( × C × i - 600 units x ` 640 x ½ x 18.75/100) 36,000
2
Total Cost 77,52,000
Q-10 Explain ‘Just In Time’ (JIT) approach of inventory management.
Ans. Just in Time (JIT) Inventory Management
JIT is a system of inventory management with an approach to have a zero inventories in stores. According
to this approach material should only be purchased when it is actually required for production.
JIT is based on two principles
(i) Produce goods only when it is required and
(ii) the products should be delivered to customers at the time only when they want.
It is also known as ‘Demand pull’ or ‘Pull through’ system of production. In this system, production
process actually starts after the order for the products is received. Based on the demand, production
process starts and the requirement for raw materials is sent to the purchase department for purchase.
This can be understood with the help of the following diagram:

Q-11 Explain: FIFO and LIFO method of stores issue.

Ans. First-in First-out (FIFO) method: It is a method of pricing the issues of materials, in the order in which
they are purchased. In other words, the materials are issued in the order in which they arrive in the
store or the items longest in stock are issued first. Thus each issue of material only recovers the
purchase price which does not reflect the current market price. This method is considered suitable in
times of falling price because the material cost charged to production will be high while the replacement
cost of materials will be low.
Last-in-First-out (LIFO) method: It is a method of pricing the issues of materials. This method is based
on the assumption that the items of the last batch (lot) purchased are the first to be issued. Therefore,
under this method the prices of the last batch (lot) are used for pricing the issues, until it is exhausted,
and so on. If however, the quantity of issue is more than the quantity of the latest lot than earlier (lot)
and its price will also be taken into consideration. During inflationary period or period of rising prices,
the use of LIFO would help to ensure that the cost of production determined on the above basis is
approximately the current one.
Q-12 M/s. SJ Private Limited manufactures 20000 units of a product per month. The cost of placing an order
is ` 1,500. The purchase price of the raw material is ` 100 per kg. The re-order period is 5 to 7 weeks. The
consumption of raw materials varies from 200 kg to 300 kg per week, the average consumption being
250 kg. The carrying cost of inventory is 9.75% per annum.
You are required to calculate:
(i) Re-order quantity
(ii) Re-order level
(iii) Maximum level
(iv) Minimum level
(v) Average stock level
Ans. Annual consumption 250 kg × 52 weeks = 13,000 kg.
2 A O
(i) Re-order Quantity or EOQ =
c i
A = Annual Consumption = 13,000 kg
O = Ordering Cost = ` 1,500
C = Cost per kg = ` 100

i = carrying cost rate = 9.75%
Carrying cost per kg per annum (c× i) = 100 × 9.75% = ` 9.75
2 ×13,000 ×1,500
 EOQ = 9.75
39000000
= 2000 kg.
9.75
(ii) Re-order level = Max. re-order period × Max, Consumption
= 7 weeks × 300 kg = 2,100 kg

(iii) Maximum level = Re-order level + Re-order Qty – (Min re-order Period × Min. Consumption)
= 2100 kg + 2000 kg – (5 × 200) kg = 3100 kg.
(iv) Minimum level = Re-order level – (Avg. re-order period × Avg. Consumption)
= 2,100 kg – (6 × 250) kg = 600 kg.
1
(v) Avg. stock level = (Max. level +Min.level)
2
1
= (3100 + 600) = 1850 kg OR
2
1
= Minimum level + ROQ
2
1
= 600 kg. + × 2000 kg. = 1600 kg.
2
Q-13 XYZ Ltd. has obtained an order to supply 48000 bearings per year from a concern. On a steady basis, it is
estimated that it costs ` 0.20 as inventory holding cost per bearing per month and the set-up cost per
run of bearing manufacture is ` 384.
(i) compute the optimum run size and number of runs for bearing manufacture.
(ii) compute the interval between two consecutive runs.
(iii) find out the extra costs to be incurred, if company adopts a policy to manufacture 8000 bearings
per run as compared to optimum run Size.
(iv) give your opinion regarding run size of bearing manufacture.
Assume 365 days in a year.
Ans.
(i) Optimum batch size or Economic Batch Quantity (EBQ):
2DS 2  48,000  384

EBQ = = = 3919.18 or 3,920 units
C 2.4
Number of Optimum runs = 48,000 ÷ 3,920 = 12.245 or 13 run
(ii) Interval between 2 runs (in days) = 365 days ÷ 13 = 28 days
Or 365÷12.24=29.82 days
(iii) If 8,000 bearings are manufactures in a run:
Total cost = Set-up cost + Inventory holding cost
= `.384×(48,000÷8,000) + (8,000÷2)× `.2.4
= 2304+9,600 = 11,904
Extra cost = `(11,904 – 9,406*) = ` 2,498/-
OR
Extra cost = ` (11,904 – 9,696*) = ` 2,208/-
* Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per annum
Average Inventory = 3,920 units ÷ 2 = 1,960 units
Carrying Cost per unit per annum = `0.2 × 12 months = `2.4
Minimum Inventory Holding Costs = 1,960 units × `2.4 = `4,704

Total cost = Set-up cost + Inventory holding cost= (12.245×384)+ 4704= ` 9,406 (approx.)
OR
Total cost = Set-up cost + Inventory holding cost= (13×384)+ 4704= ` 9,696 (approx.)
(iv) To save cost the company should run at optimum batch size i.e. 3,920 Units. It saves ` 2,498 or
2208. Run size should match with the Economic production run of bearing manufacture. When
managers of a manufacturing operation make decisions about the number of units to produce
for each production run, they must consider the costs related to setting up the production
process and the costs of holding inventory
Alternative presentation to part 3(a) (iii)
Statement showing Total Cost at Production Run size of 3,600 and 8,000 bearings
A. Annual requirement 48,000 48,000
B. Run Size 3,920 8,000
C. No. of runs (A/B) 12.245 6
D. Set up cost per run ` 384 ` 384
E. Total set up cost (CxD) ` 4,702 ` 2,304
F. Average inventory (B/2) 1,960 4,000
G. Carrying cost per unit p.a. 2.40 2.40
H. Total Carrying cost (FxG) 4,704 9,600
I. Total cost (E+H) 9,406 11,904
Extra cost incurred, if run size is of 8,000= `11,904-9,406= ` 2,498
Q-14 Explain obsolescence and circumstances under which materials become obsolete. State the steps to
be taken for its treatment.
Ans. Obsolescence: Obsolescence is defined as “the loss in the intrinsic value of an asset due to its
supersession”.
Materials may become obsolete under any of the following circumstances:
(i) where it is a spare part, or a component of a machinery used in manufacture and that machinery
becomes obsolete;
(ii) where it is used in the manufacture of a product which has become obsolete;
(iii) where the material itself is replaced by another material due to either improved quality or fall in
price.
Treatment:In all three cases, the value of the obsolete material held in stock is a total loss and immediate
steps should be taken to dispose it off at the best available price. The loss arising out of obsolete
materials on abnormal loss does not form part of the cost of manufacture.
Q-15 Arnav Motors Ltd. manufactures pistons used in car engines. As per the study conducted by the Auto
Parts Manufacturers Association, there will be a demand of 80 million pistons in the c oming year.
Arnav Motors Ltd. is expected to have a market share of 1.15% of the total market demand of the
pistons in the coming year. It is estimated that it costs Rs.1.50 as inventory holding cost per piston per
month and that the set-up cost per run of piston manufacture is Rs. 3,500.
(i) DETERMINE the optimum run size for piston manufacturing?
(ii) Assuming that the company has a policy of manufacturing 40,000 pistons per run, Calculate how
much extra costs the company would be incurring as compared to the optimum run suggested in
(i) above?

Ans.
2 D S
(i) Optimum run size or Economic Batch Quantity (EBQ) =
C
Where, D = Annual demand i.e. 1.15% of 8,00,00,000 = 9,20,000 units
S = Set-up cost per run = Rs. 3,500
C = Inventory holding cost per unit per annum
= Rs. 1.5 × 12 months = Rs. 18
2  9,20,000 unis  Rs. 3,500

EBQ = = 18,915 units
Rs.18
(ii) Calculation of T otal Cost of set-up and inventory holding
Batch size No. of set-ups Set- up Inventory holding Total Cost
Cost (Rs.) cost (Rs.) ( Rs.)
40,000 units 23 80,500 3,60,000 4,40,500
 9, 20, 000   40, 000  Rs.18 

  ( 23 × Rs. 3,500)  
 40, 000   2 
B 49 1,71,500 1,70,235 3,41,735
 9,20, 000   18, 915  Rs.18 

18,915 units   (49 × Rs.3,500)  
 18, 915   2 
Extra Cost (A – B) 98,765
Q-16 A Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of Dee is
required. As per the sales forecast conducted by the company, it will able to sale 20,000 units of Exe in
the coming year. The following is the information regarding the raw material Dee:
(v) The purchase price is Rs.125 per kg.
There is an opening stock of 1,800 units of the finished product Exe.
To place an order company has to incur Rs. 720 on paper and documentation work.
From the above information COMPUT E the followings in relation to raw material Dee:

Ans : Working Notes:

(i) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:
Less: Opening stock of ‘Exe’ 1,800 units
Raw material required to produce 18,200 units of ‘Exe’
(18,200 units × 2 kg.) 36,400 kg.
Annual demand for raw material ‘Dee’ 34,400 kg.
EOQ =

(iv) Minimum consumption per day of raw material ‘Dee’:

Average Consumption per day = 100 kg.
So, Minimum consumption per day will be
Average Consumption = Min.consumption Max.consumption / 2
Or, 100 kg. = Min.consumption 120kg. / 2
(a) Re-order Quantity:
EOQ – 200 kg. = 1,697 kg. – 200 kg. = 1,497 kg.
= 960 kg. + 1,497 kg. – (80 kg. × 4 days)
= 2,457 kg. – 320 kg. = 2,137 kg.
= 960 kg. – (100 kg. × 6 days) = 360 kg.

II No. of orders a year 34,400kg./1,497kg. 34,400 kg./1,697kg.
= 22.9or 23orders = 20.27or 21orders
III Ordering Cost 23 orders × Rs. 720 = Rs.16,560 21 orders × Rs. 720 =
Rs.15,120
IV Average Inventory 1,497kg./2 = 748.5kg. 1,697kg./2 = 848.5kg.
V Carrying Cost 748.5 kg. × Rs. 17.2 = 848.5 kg. × Rs. 17.2 =
Rs.12,874.2 Rs.14,594.2
VI Total Cost Rs. 29,434.20 Rs. 29,714.20
Cost saved by not ordering EOQ = Rs. 29,714.20 - Rs. 29,434.20 = Rs. 280.
Q-17 A store keeper has prepared the below list of items kept in the store of the factory.
Item Units Unit cost (`)
A 12,000 30.00
B 18,000 3.00
C 6,000 35.00
D 750 220.00
E 3,800 75.00
F 400 105.00
G 600 300.00
H 300 350.00
I 3,000 250.00
J 20,000 7.50
K 11,500 27.50
L 2,100 75.00
The store keeper requires your help to classify the items for prioritization. You are required to APPLY
ABC analysis to classify the store items as follows:
Store items which constitutes approx 70%, 20% and 10% of total value as A, B and C respectively.
Ans. Statement of Total Cost and Ranking
Item Units % of Total Unit cost (`) Total cost (`) % of Total cost Ranking
units
A 12,000 15.30% 30.00 3,60,000 12.97% 2
B 18,000 22.94% 3.00 54,000 1.95% 11
C 6,000 7.65% 35.00 2,10,000 7.57% 5
D 750 0.96% 220.00 1,65,000 5.95% 7
E 3,800 4.84% 75.00 2,85,000 10.27% 4
F 400 0.51% 105.00 42,000 1.51% 12
G 600 0.76% 300.00 1,80,000 6.49% 6
H 300 0.38% 350.00 1,05,000 3.78% 10

I 3,000 3.82% 250.00 7,50,000 27.03% 1

J 20,000 25.49% 7.50 1,50,000 5.41% 9
K 11,500 14.66% 27.50 3,16,250 11.40% 3
L 2,100 2.68% 75.00 1,57,500 5.68% 8
78,450 100.00% 27,74,750 100.00%
Statement of classification of Inventory
Ranking Item % of Total units Cost (`) % of Total Cost Category
1 I 3.82% 7,50,000 27.03%
2 A 15.30% 3,60,000 12.97%
3 K 14.66% 3,16,250 11.40%
4 E 4.84% 2,85,000 10.27%
5 C 7.65% 2,10,000 7.57%
Total 46.27% 19,21,250 69.24% A
6 G 0.76% 1,80,000 6.49%
7 D 0.96% 1,65,000 5.95%
8 L 2.68% 1,57,500 5.68%
9 J 25.49% 1,50,000 5.41%
Total 29.89% 6,52,500 23.53% B
10 H 0.38% 1,05,000 3.78%
11 B 22.94% 54,000 1.95%
12 F 0.51% 42,000 1.51%
Total 23.84% 2,01,000 7.24 C
12 100% 27,74,750 100%
Q-18 SV chemicals Limited processes 9,00,000 kgs. of raw material in a month purchased at ` 95 per kg in
department X. The input output ratio of department X is 100 : 90. Processing of the material results in
two joint products being produced ‘P1’ and ‘P2’ in the ratio of 60 : 40. Product ‘P1’ can be sold at split off
stage or can be further processed in department Y and sold as a new product ‘YP1’. The input output
ratio of department Y is 100 : 95. Department Y is utilized only for further processing of product ‘YP1’ to
product P1. Individual departmental expenses are as follows:
Dept. X (` lakhs) Dept. Y (` lakhs)
Direct Materials 95.00 14.00
Direct Wages 80.00 27.00
Variable Overheads 100.00 35.00
Fixed Overheads 75.00 52.00
Total 350.00 128.00
Further, selling expenses to be incurred on three products are:
Particulars Amount (` in lakhs)
Product ‘P1’ 28.38
Product ‘P2’ 25.00
Product ‘YP1’ 19.00

Selling price of the products ‘P1’ and ‘P2’ at split off point is ` 110 per kg and ` 325 per kg respectively.
Selling price of new product ‘YP1’ is ` 150 per kg.
(i) Prepare a statement showing apportionment of joint costs, in the ratio of value of sales, net of
selling expenses.
(ii) Prepare a Statement showing profitability at split off point.
(iii) Prepare a Statement of profitability of ‘YP1’.
(iv) Determine that would you recommend further processing of P1?
Ans. Working Notes:
Input output ratio of material processed in Department X = 100:90
Particulars Quantity (Kg)
Material input 9,00,000
Less: Loss of material in process @ 10% of 9,00,000 kgs (90,000)
Output 8,10,000
Output of department X is product ‘P1’ and ‘P2’ in the ratio of 60 : 40.
60  8,10,000
Output ‘P1’ = = 4,86,000 kgs.
100
40  8,10,000
Output ‘P2’ = = 3,24,000 kgs.
100
Statement showing ratio of net sales
Product P1 P2 Total
Quantity (kgs) 4,86,000 3,24,000 8,10,000
Selling price per kg (`) 110.00 325.00
Sales Value (` in lakhs) 534.60 1,053.00 1587.60
Less: Selling Expenses (` in l akhs) (28.38) (25.00) (53.38)
Net Sales (` in lakhs) 506.22 1,028.00 1,534.22
Ratio 33% 67% 100.00
Computation of Joint Costs
Particulars Amount (` Lakhs)
Raw Material input 9,00,000 kgs @ ` 95 per kg 855.00
Direct Materials 95.00
Direct Wages 80.00
Variable Overheads 100.00
Fixed Overheads 75.00
Total 1,205.00
(i) Statement showing apportionment of joint costs in the ratio of net sales
Particulars Amount (` in lakhs)
Joint cost of P1 – 33% of ` 1,205 lakhs 397.65
Joint cost of P2 – 67% of ` 1,205 lakhs 807.35
Total 1,205.00

(ii) Statement showing profitability at split off point

Product P1 P2 Total
Net Sales Value (` in lakhs) – [A] 506.22 1,028.00 1,534.22
Less: Joint costs (` in lakhs) (397.65) (807.35) (1,205.00)
Profit (` i n lakhs) [A] – [B] 108.57 220.65 329.22
Alternative Presentation
Product P1 P2 Total
Sales Value (` i n lakhs) – [A] 534.60 1,053.00 1,587.60
Less: Joint costs (` in lakhs) 397.65 807.35 1,205.00
Selling Expenses 28.38 25.00 53.38
Total Cost [B] 426.03 832.35 1,258.38
Profit (` i n lakhs) [A] – [B] 108.57 220.65 329.22
(iii) Statement of profitability of product ‘YP 1’
Particulars YP1
Sales Value (` i n lakhs) (Refer working note) [A] 629.55
Less: Cost of P1 397.65
Cost of Department Y 128.00
Selling Expenses of Product ‘YP1’ 19.00
Total Costs [B] 544.65
Profit (` in lakhs) [A] – [B] 84.90
Working Note:
Computation of product ‘YP1’
Quantity of product P1 input used = 4,86,000 kgs
Input output ratio of material processed in Department Y = 100 : 95
Particulars Quantity (Kg)
Material input 4,86,000
Less: Loss of material in process @ 5% of 4,86,000 (24,300)
Output 4,61,700
Sales Value of YP1 = 4,61,700 kgs @ ` 150 per kg = ` 692.55 lakhs
(iv) Determination of profitability after further processing of product P1 into product YP1:
Particulars (` in lakhs)
Profit of Product ‘ P1’ {refer (ii) above} 108.57
Profit of Product ‘YP1’{refer (iii) above} 84.90
Decrease in profit after further processing 23.67
Based on the above profitability statement, further processing of product P1 into YP1 should not be
recommended.
Q-19 State how Economic Batch Quantity is determined?
Ans. In batch costing the most important problem is the determination of ‘Economic Batch Quantity’ The
determination of economic batch quantity involves two types of costs viz, (i) set up cost and (ii) carrying
cost. With the increase in the batch size, there is an increase in the carrying cost but the set -up cost per
unit of the product is reduced; this situation is reversed when the batch size is reduced. Thus there is
one particular batch size for which both set up and carrying costs are minimum. This size of a batch is
known as economic or optimum batch quantity.

Economic batch quantity can be determined with the help of a table, graph or mathematical formula.
The mathematical formula usually used for its determination is as follows:
2DC
EBQ =
C
Where,
D = Annual demand for the product
S = Setting up cost per batch
C = Carrying cost per unit of production per annum
Q-20 The annual demand for an item of raw material is 4,000 units and the purchase price is expected to be
Rs. 90 per unit. The incremental cost of processing an order is Rs. 135 and the annual cost of storage is
estimated to be Rs. 12 per unit. COMPUTE the optimal order quantity and total relevant cost of this
order quantity?
Suppose that Rs. 135 as estimated to be the incremental cost of processing an order is incorrect and
should have been Rs. 80. All other estimates are correct. ESTIMATE the difference in cost on account of
this error?
Assume at the commencement of the period that a supplier offers 4,000 units at a price of Rs. 86. The
materials will be delivered immediately and placed in the stores. Assume that the incremental cost of
placing the order is zero and original estimate of Rs. 135 for placing an order for the economic batch is
correct. ANALYSE, should the order be accepted?
Ans. (i) Optimal order quantity i.e. E.O.Q.
2  4,000  135
= 90,000 = 300 units
12
Relevant Cost of this order quantity Rs.
4,000
Ordering cost = 13.33 say 14 orders at Rs. 135 1,890
300
1
Carrying Cost = × 300 × 12 1,800
2
Relevant cost 3,690
2  4,000  80
(ii) Revised EOQ = = 231 units
12
4,000
Ordering cost = = 17.32 say 18 orders at Rs. 80 1,440
231
1
Carrying cost = × 231 × 12 1,386
2
2,826
Different in cost on account of this error = 3,690 – 2,826 = Rs. 864
(iii) In case of discount in purchase price, the total cost of Purchase cost, ordering cost and carrying cost
should be compared.

Original offer at Rs. 90 per unit Supplier offered at Rs. 86 per unit
Rs. Rs.
Purchase Cost 3,60,000 Purchase cost 4,000 × 86 3,44,000
Ordering cost 1,890 Ordering cost Nil
1
Carrying cost 1,800 Carrying cost × 4,000 × 12 24,000
2
Total cost 3,63,690 3,68,000
This special offer at Rs. 86 per unit should not be accepted as its total cost is higher by Rs. 4,310 (3,68,000
– 3,63,690).as compared to original offer.
Q-21 A Ltd. manufactures a product X which requires two raw materials A and B in a ratio of 1:4. The sales
department has estimated a demand of 5,00,000 units for the product for the year. To produce one unit
of finished product, 4 units of material A is required.
Stock position at the beginning of the year is as below:
Product- X 12,000 units
Material A 24,000 units
Material B 52,000 units
To place an order the company has to spend Rs.15,000. The company is financing its working
capital using a bank cash credit @13% p.a.
Product X is sold at Rs.1,040 per unit. Material A and B are purchased at Rs.150 and Rs.200
respectively.
Required:
COMPUTE economic order quantity (EOQ):
(i) If purchase order for the both materials is placed separately.
(ii) If purchase order for the both materials is not placed separately.
Ans. Workings:
Annual production of Product X = Annual demand – Opening stock
= 5,00,000 – 12,000 = 4,88,000 units
Annual requirement for raw materials = Annual production × Material per unit – Opening stock of
material
Material A = 4,88,000 × 4 units – 24,000 units = 19,28,000 units
Material B = 4,88,000 × 16 units – 52,000 units = 77,56,000 units
(i) Computation of EOQ when purchase order for the both materials is placed separately
2 × Annual Requirement for material × Ordering cost

EOQ =
2  19,28,000units ×Rs.15,000 38,56,000 ×Rs.15,000

Material A = =
13% of Rs.150 Rs.19.5
= 54,462 units
2 × 77,56,000units × Rs.15,000 1,55,12,000 ×Rs.15,000

Material B = =
13%ofRs.200 Rs.26
= 94,600 units

(ii) Computation of EOQ when purchase order for the both materials is not placed separately
2 ×(19,28,000 + 77,56,000)units × Rs.15,000

Material A & B =
13% of Rs.190 *
1,93,68,000 Rs.15,000
= = 1,08,452units
Rs.24.7
1,08,452  19,28,000
Material A = =21,592units
96,84,000
1,08,452 × 77,56,000
Material A = = 86,860units
96,84,000
*(Rs.150 ×19,28,000) (Rs.200 × 77,56,000)

= = Rs 190
(19,28,000 77,56,000)
Q-22 Distinguish between Bill of Materials and Material Requisition Note.
Ans.
Bills of Material Material Requisition Note
1. It is document or list of materials 1. It is prepared by the foreman of the
prepared by the engineering/ consuming department.
drawing department.
2. It is a complete schedule of 2. It is a document authorizing Store-Keeper
component parts and raw materials to issue material to the consuming department.
required for a particular job or
work order.
3. It often serves the purpose of a Store 3. It cannot replace a bill of material.
Requisition as it shows the complete
schedule of materials required for a
particular job i.e. it can replace stores
requisition.
4. It can be used for the purpose of 4. It is useful in arriving historical cost only.
quotation.
5. It helps in keeping a quantitative 5. It shows the material actually drawn from
control on materials drawn through stores.
Stores Requisition.
Q-23 A company manufactures a product from a raw material, which is purchased at Rs. 54 per kg. The
company incurs a handling cost of Rs.1,500 plus freight of Rs.4,000 per order. The incremental carrying
cost of inventory of raw material is Rs.1.50 per kg per month. In addition, the cost of working capital
finance on the investment in inventory of raw material is Rs.8 per kg per annum. The annual production
of the product is 96,000 units and 4 units are obtained from one kg of raw material.
Required:
(i) CALCULATE the economic order quantity of raw materials.
(ii) ADVISE, how frequently orders should be placed for procurement.

(iii) If the company proposes to rationalize placement of orders on quarterly basis, DETERMINE what
percentage of discount in the price of raw materials should be negotiated?
Ans.
2AO
(i) EOQ =
C
96, 000units × 1kg.

A = Annual consumption = = 24,000 kgs.
4 units
O = Cost of placing order = Handling cost + Freight = ` 1,500 + ` 4,000 = ` 5,500
C = Carrying cost per kg. per annum
Carrying cost (` 1.50 × 12) = ` 18
Finance charges on investment in inventory = `8
= ` 26
2  24,000 kgs. ` 5,500

EOQ = = 3,186.5 kgs.
` 26
(ii) Number of orders = 24,000 kgs./ 3,186.5 kgs. = 7.53 or 8 ordersFrequency in placing orders = 365 days / 8
orders = 45.63 or 46 days
(iii) If company places orders on quarterly basis, percentage of discount in price of raw material to be
negotiated:
Cost under EOQ:
Ordering cost 8 orders × ` 5,500 44,000.00
Carrying cost 3,186.5kgs. × ½ × ` 26 41,424.50
Total 85,424.50
Cost under Ordering on Quarterly Basis :
Ordering cost 4 orders × ` 5,500 22,000.00
Carrying cost (24,000 kgs./ 4 orders) × ½ × ` 26 78,000.00 Inc
Total 1,00,000.00
Incremental cost if orders are placed on quarterly basis
= ` 1,00,000– ` 85,424.50 = ` 14,575.50
Reduction in purchase price to be negotiated
= ` 14,575.50 ÷ 24,000 kgs. = ` 0.61 per kg.
Percentage of discount to be negotiated 0.61 ÷ 54 × 100 = 1.13%.
Q-24 M/s. KBC Bearings Ltd. is committed to supply 48,000 bearings per annum to M/s. KMR Fans on a steady
daily basis. It is estimated that it costs Rs. 1 as inventory holding cost per bearing per month and that
the set up cost per run of bearing manufacture is Rs. 3,200
(i) DETERMINE what would be the optimum run size of bearing manufacture?
(ii) DETERMINE What would be the interval between two consecutive optimum runs?
(iii) CALCULATE the minimum inventory cost?
Ans.
(i) Optimum batch size or Economic Batch Quantity (EBQ):
2DS 2  48,000  3,200

EBQ = = = 5,060 units.
C 12

(ii) Number of Optimum runs = 48,000 ÷ 5,060 = 9.49 or 10 runsInterval between 2 runs (in days) = 365 days
÷ 10 = 36.5 days
(iii) Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per annum
Average Inventory = 5,060 units ÷ 2 = 2,530 units
Carrying Cost per unit per annum = ` 1 × 12 months = ` 12
Minimum Inventory Holding Costs = 2,530 units × ` 12 = ` 30,360.
Q-25 Arnav Motors Ltd. manufactures pistons used in car engines. As per the study conducted by the Auto
Parts Manufacturers Association, there will be a demand of 80 million pistons in the coming year. Arnav
Motors Ltd. is expected to have a market share of 1.15% of the total market demand of the pistons in
the coming year. It is estimated that it costs Rs.1.50 as inventory holding cost per piston per month and
that the set-up cost per run of piston manufacture is Rs. 3,500.
(i) DETERMINE the optimum run size for piston manufacturing?
(ii) Assuming that the company has a policy of manufacturing 40,000 pistons per run, CALCULATE the
extra costs company would be incurring as compared to the optimum run suggested in (i) above?
(iii) IDENTIFY variability of cost with respect to unit and batch level from the following cost:
(a) Inventory carrying cost; (b) Designing cost for a job; (c) Machine set-up cost to run
production and (d) Depreciation of factory building.
Ans.
2D S
C
S = Set-up cost per run = ` 3,500
= ` 1.5 × 12 months = ` 18
2  9,20,000 units ` 3, 500

` 18
(ii) Calculation of Total Cost of set-up and inventory holding

Batch size No. of set-ups Set-up Cost Inventory holding Total Cost
(`) cost (`) (`)
A 40,000 units 23 80,500 3,60,000 4,40,500
 9,20, 000   40,000 ` 18 
  (23 × ` 3,500)  
 40, 000   2 
B 18,915 units 49 1,71,500 1,70,235 3,41,735
 9,20, 000   18,915 ` 18 
  (49 × ` 3,500)  
 18, 915   2 
(iii) Costs Unit level Batch level
(a) Inventory carrying cost Variable cost Variable cost
(b) Designing cost for a job Fixed cost Variable cost, provided the entire job
work is processed in a single batch.
(c) Machine set-up cost to
run production Fixed cost Variable cost
(d) Depreciation of factory building Fixed cost Fixed cost

Q-26 A Ltd. manufactures pistons used in car engines. As per the study conducted by the Auto Parts
Manufacturers Association, there will be a demand of 80 million pistons in the coming year. A Ltd. is
expected to have a market share of 1.15% of the total market demand of the pistons in the coming year.
It is estimated that it costs Rs.1.50 as inventory holding cost per piston per month and that the set-up
cost per run of piston manufacture is Rs. 3,500.
(i) COMPUTE the optimum run size for piston manufacturing?
(ii) Assuming that the company has a policy of manufacturing 40,000 pistons per run, CALCULATE how
(i) above?
Ans.
2×D × S
C
S = Set-up cost per run = Rs. 3,500
= Rs.1.5 × 12 months = Rs. 18
2 × 9,20,000units × Rs.3,500
Rs.18
Batch size No. of setups Set-up Cost Inventory Total Cost
(Rs.) holding cost (Rs.)
(Rs.)
A 40,000 units 23 80,0500 3,60,000 4,40,500
 9, 20, 000   40, 000 × Rs.18 
  (23 × Rs. 3,500)  
 40, 000   2 
B 18,915 units 49 1,71,500 1,70,235 3,41,735

 9, 20, 000   18, 915 × Rs.18 
  (49 × Rs.3,500)  
 18, 915   2 
Due to the purchase policy costs the company Rs. 98,765.
Q-27 A customer has been ordering 90,000 special design metal columns at the rate of 18,000 columns per
order during the past years. The production cost comprises Rs. 2,120 for material, Rs. 60 for labour and
Rs. 20 for fixed overheads. It costs Rs.1,500 to set up for one run of 18,000 column and inventory
carrying cost is 5%.
(i) DETERMINE the most economic production run.
(ii) CALCULATE the extra cost that company incur due to processing of 18,000 columns in a batch.
Ans. (i) Calculation of Economic Batch Quantity (EBQ)
2 × 90,000 × `1, 500 27,00,00, 000

EBQ = = = 1,567columns
5% of `12,200 `110
(ii) Calculation of Extra Cost due to processing of 18,000 columns in a batch

When run size is 1,567columns When run size is 18,000 columns

90,000 90,000
Total set up cost = × Rs.1, 500 = × Rs.1,500 = Rs.7, 500
1, 567 18, 000
Total Carryingcost ½ × 1,567 × Rs.110= Rs. 86,185 ½ × 18,000 × Rs.110= Rs.9,90,000
Total Cost Rs.1,73,185 Rs.9,97,500
Thus, extra cost = Rs.9,97,500 - Rs.1,73,185 = Rs.8,24,315
Q-28 A Ltd. produces a product ‘Exe’ using a raw material Dee. To produce one unit of Exe, 2 kg of Dee is
required. As per the sales forecast conducted by the company, it will able to sale 10,000 units of Exe in
the coming year. The following is the information regarding the raw material Dee:
(v) The purchase price is Rs.125 per kg.
There is an opening stock of 900 units of the finished product Exe.
To place an order company has to incur Rs.720 on paper and documentation work.
From the above information, COMPUTE the followings in relation to raw material Dee:
(i) Re-order Quantity
(ii) Maximum Stock level
(iii) Minimum Stock level
(iv) The impact on the profitability of the company by not ordering the EOQ. [Take 364 days for a year]
Ans. Working Notes:
(1) Computation of Annual consumption & Annual Demand for raw material ‘Dee’:
Less: Opening stock of ‘Exe’ 900 units
Raw material required to produce 9,100 units of ‘Exe’(9,100 units × 2 kg.) 18,200 kg.
Annual demand for raw material ‘Dee’ 17,200 kg
(2) Computation of Economic Order Quantity (EOQ):
2 × Annual demand of 'Dee' Ordering × c os t

EOQ =
Carrying cos t per unit per annum
2 × 17,200kg × Rs.720 2 × 17,200kg × Rs.720

= = = 1,200kg
Rs.125 × 13.76% Rs.17.2
(3) Re- Order level:

 Annual Consumption of 'Dee '  

=  + 20kg  × 8 days 
 364 days  
 18,200kg  
=  + 20kg  × 8 days  = 560kg.
 364 days  
(4) Minimum consumption per day of raw material ‘Dee’:
Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg
So, Minimum consumption per day will be
Min.consumption + Max.consumption
Average Consumption =
2
Min.consumption + 70kg.
Or, 50 kg =
2
(i) Re-order Quantity:
EOQ – 200 kg. = 1,200 kg. – 200 kg. = 1,000 kg.
(ii) Maximum Stock level:= Re-order level + Re-order Quantity – (Min. consumption per day × Min.
lead time)= 560 kg. + 1,000 kg. – (30 kg. × 4 days) = 1,560 kg. – 120 kg. = 1,440 kg
(iii) Minimum Stock level:
= 560 kg. – (50 kg. × 6 days) = 260 kg
(iv) Impact on the profitability of the company by not ordering the EOQ
I Order quantity 1,000 kg. 1,200 kg
17,200 kg 17,200 kg
II No. of orders a year = 17.2 or 18 orders = 14.33 or 15 orders
1,000 kg 1,200 kg
III Ordering Cost 18 orders × Rs. 720 15 orders × Rs. 720
= Rs.12,960 = Rs.10,800
1, 000 kg 1,200 kg
IV Average Inventory = 500 kg = 600 kg
2 2
V Carrying Cost 500 kg. × Rs. 17.2 600 kg. × Rs. 17.2
= Rs. 8,600 = Rs. 10,320
VI Total Cost Rs. 21,560 Rs. 21,120
Extra Cost incurred due to not ordering EOQ = Rs. 21,560 - Rs. 21,120 = Rs.440.
Q-29 A company deals in trading of a toy car ‘Terminato’. The annual demand for the toy car is 9,680 units.
The company incurs fixed order placement and transportation cost of ` 200 each time an order is
placed. Each toy costs ` 400 and the trader has a carrying cost of 20 percent p.a.
The company has been offered a quantity discount of 5% on the purchase of ‘Terminato’ provided the
order size is 4,840 units at a time.

Required:
(i) COMPUTE the economic order quantity
(ii) STATE whether the quantity discount offer can be accepted.
Ans.(i) Calculation of Economic Order Quantity
2AC 2 × 9,680 units × Rs.200

EOQ = = = 220 units
C Rs.400 × 20%
(ii) Evaluation of Profitability of Different Options of Order Quantity
(A) When EOQ is ordered
(`)
Ordering Cost [(9,680 units/220 units) x ` 200] 8,800
Carrying Cost (220 units x ½ x ` 400 x 20%) 8,800
(B) When Quantity Discount is accepted
(`)
Ordering Cost [(9,680 units/4,840 units) x ` 200] 400
Carrying Cost (4,840 units x ½ x ` 380 x 20%) 1,83,920
Advise – The total cost of inventory is lower if quantity discount is accepted. The company would save
`26,880 (` 38,89,600 - ` 38,62,720).
Q-30 A company uses four raw materials A, B, C and D for a particular product for which the following data
apply:–
Raw Usage Re-order Price Delivery period Re-order Minimum
Material per unit Quantity per Kg. (in weeks) level level
of (Kg.) (` ) (Kg.) (Kg.)
product Minimum Average Maximum
(Kg.)
A 12 12,000 12 2 3 4 60,000 ?
B 8 8,000 22 5 6 7 70,000 ?
C 6 10,000 18 3 5 7 ? 25,500
D 5 9,000 20 1 2 3 ? ?
Weekly production varies from 550 to 1,250 units, averaging 900 units of the said product. What would be
the following quantities:–
(i) Minimum Stock of A?
(ii) Maximum Stock of B?
(iii) Re-order level of C?
(iv) Average stock level of A?
(v) Re-order level of D?
(vi) Minimum Stock level of D?

Ans.(i) Minimum stock of A

Re-order level – (Average consumption × Average time required to obtain delivery)
= 60,000 kg. – (900units × 12 kg. × 3 weeks) = 27,600 kg.
(ii) Maximum stock of B
Re-order level + Re-order quantity– (Min. Consumption × Min. Re-order period)
= 70,000 kg.+ 8,000 kg– (550units ×8 kg.× 5 weeks).
=78,000–22,000 = 56,000 kg.
(iii) Re-order level of C
Maximum re-order period × Maximum Usage
= 7 weeks × (1,250units × 6 kg.) = 52,500 kg.
OR
= Minimum stock of C+(Average consumption × Average delivery time)
= 25,500 kg.+ [(900 units ×6 kg.)×5 weeks] =52,500 kg.
(iv) Average stock level of A
Minimum stock + Maximum stock

Refer to Working Note 
2
27, 600 + 58,800

= 43,200 kg.
2
Working note
Maximum stock of A = ROL + ROQ – (Minimum consumption × Minimum re-order period)
= 60,000 kg. + 12,000 kg. – [(550units × 12 kg.) × 2 weeks] = 58,800 kg.
(v) Re-order level of D
Maximum re-order period × Maximum Usage
= 3 weeks × (1,250 units × 5 kg.) = 18,750 kg
(vi) Minimum stock of D
Re-order level – (Average consumption × Average time required to obtain delivery)
= 18,750 kg. – (900units × 5 kg. × 2 weeks) = 9,750 kg.
2. Workings:
1. Normal working hours in a month = (Daily working hours – lunch break) × no. of days
= (8 hours – 0.5 hours) × 26 days = 195 hours
2. Hours worked by Mr.Z = No. of normal days worked + Overtime + holiday/ Sunday worked
= (21 days × 7.5 hours) + (9.5 hours + 8.5 hours) + (5 hours + 6 hours)
= 157.5 hours + 18 hours + 11 hours = 186.50 hours.

(i) Calculation of earnings per day

Particulars Amount (`)
Basic salary (`1,000 × 26 days) 26,000
Dearness allowance (20% of basic salary) 5,200
31,200
House rent allowance (16% of basic salary) 4,160
Employer’s contribution to Provident fund (12% × `31,200) 3,744
Employer’s contribution to Pension fund (7% × `31,200) 2,184
41,288
No. of working days in a month (days) 26
Rate per day 1,588
Transport allowance per day 50
Earnings per day 1,638
(ii) Calculation of effective wage rate per hour of Mr. Z:
Basic salary ( `1,000 × 26 days) 26,000
Additional basic salary for Sunday & holiday (`1,000 × 2 days) 2,000
33,600
Transport allowance ( `50 × 23 days) 1,150
Overtime allowance ( `160 × 2 × 2 hours)* 640
Employer’s contribution to Provident fund (12% × ` 33,600) 4,032
Employer’s contribution to Pension fund (7% × ` 33,600) 2,352
Total monthly wages 46,254
Hours worked by Mr. Z (hours) 186.5
Effective wage rate per hour 248
*(Daily Basic + DA) ÷ 7.5 hours
= (1,000+200) ÷ 7.5 = `160 per hour
(iii) Calculation of wages to be charged to Job no. HT200
= ` 248 × 100 hours = ` 24,800
Q-31 The annual demand for an item of raw material is 48,000 units and the purchase price is ` 80 per unit.
The cost of processing an order is ` 1,350 and the annual cost of storage is ` 15 per unit.
(i) DETERMINE is the optimal order quantity and total relevant cost for the order?
(ii) If the cost of processing an order is ` 800 and all other data remain same, then DETERMINE the
differential cost?
(iii) If the supplier offers bulk purchase of 48,000 units at a price of ` 72 and cost of placing the is Nil,
SHOULD the order be accepted?

Ans. (i) Optimal order quantity i.e. E.O.Q.
Relevant Cost of this order quantity `

Ordering cost = 48,000 / 2,939 =16.33, say 17 orders at ` 1,350 22,950.00
Carrying Cost = 1 / 2 × 2,939 × 15 22,042.50
Relevant cost 44,992.50
(ii) Revised EOQ =
Relevant Cost of this order quantity `

Ordering cost = 48,000 / 2,263 = 21.21, say 22 orders at ` 800 17,600.00
Carrying cost = 1/2 × 2,263 × 15 16,972.50
Relevant cost 34,572.50
Differential cost = 44,992.50 – 34,572.50 = ` 10,420
(iii) In case of discount in purchase price, the total cost of Purchase cost, ordering cost and carrying cost
should be compared.
Original offer at ‘ 80 per unit Supplier offered at ` 72 per unit
` `
Purchase Cost (48,000 × 80) 38,40,000.00 Purchase cost 34,56,000.00
(48,000 × 72)
Ordering cost 22,950.00 Ordering cost 0.00
Carrying cost 22,042.50 Carrying cost
1 / 2 × 48,000 × 15 3,60,000.00
Total cost 38,84,992.50 38,16,000.00
This special offer at ` 72 per unit should be accepted as it saves ` 68,992.50 as compared to original
offer.
Q-32 Zee Ltd. manufactures pistons used in car engines. As per the study conducted by the Auto Parts
Manufacturers Association, there will be a demand of 80 million pistons in the coming year. A Ltd. is
expected to have a market share of 2.15% of the total market demand of the pistons in the coming year.
It is estimated that it costs ` 2.50 as inventory holding cost per piston per month and that the set-up
cost per run of piston manufacture is ` 4,500.
(i) COMPUTE the optimum run size for piston manufacturing?
(ii) Assuming that the company has a policy of manufacturing 20,000 pistons per run, CALCULATE how
much extra costs the company would be incurring as compared to the optimum run suggested in (i)
above?
2 D S
Ans. (i) Optimum run size or Economic Batch Quantity (EBQ) =
C

S = Set-up cost per run = ` 4,500

= ` 2.5 x 12 months = ` 30

Batch size No. of set-ups Set-up Inventory Total Cost
Cost holding cost
(`) (`) (`)
A 20,000 86 3,87,000 3,00,000 6,87,000
units
B 22,716 76 3,42,000 3,40,740 6,82,740
units
Extra Cost (A - B) 4,260

Q-33 The yearly production of a company’s product which has a steady market is 40,000 units. Each unit of a
product requires 1 kg. of raw material. The cost of placing one order for raw material is ` 1,000 and the
inventory carrying cost is ` 20 per annum. The lead time for procurement of raw material is 36 days and
a safety stock of 1,000 kg. of raw materials is maintained by the company. The company has been able
to negotiate the following discount structure with the raw material supplier:
Order quantity (kg.) Discount (`)
Upto 6,000 NIL
6,001 – 8,000 4,000
8,001 – 16,000 20,000
16,001 – 30,000 32,000
30,001 – 45,000 4,0000
You are REQUIRED to:
(i) Calculate the re-order point considering 30 days in a month.
(ii) Prepare a statement showing the total cost of procurement and storage of raw material after
considering the discount of the company elects to place one, two, four or five orders in the year.
(iii) State the number of orders which the company should place to minimize the costs after taking
EOQ also into consideration.
Ans. Working notes
1. Annual production = 40,000 units
2. Raw material required for 40,000 units (40,000 units x 1 kg.) = 40,000 kg.
3. EOQ = = 2,000 kgs.

4. Total cost of procurement and storage when the order size is equal to EOQ or 2,000 kg.
No. of orders (40,000 kg.  2,000 kg.) = 20 times
Ordering cost (20 orders x `1,000) = ` 20,000
Carrying cost (`) (1/2 x 2,000 kg. x ` 20) = ` 20,000
Total cost ` 40,000
(i) Re-order point = Safety stock + Lead time consumption
40,000 kg.
= 1,000 kg. + x 36 days
360 days
= 1,000 kg. + 4,000 kg. = 5,000 kg.
(ii) Statement showing the total cost of procurement and storage of raw materials
(after considering the discount)
Order No. of Total cost of Average Total cost of Discount Total cost
size orders procurement stock storage of raw
materials
Kg. (`) Kg. (`) (`) (`)
(1) (2) (3)=(2) x ` 1,000 (4)=1/2x(1) (5)=(4)x ` 20 (6) (7)=[(3)+(5)x(6)]
40,000 1 1,000 20,000 4,00,000 40,000 3,61,000
20,000 2 2,000 10,000 2,00,000 32,000 1,70,000
10,000 4 4,000 5,000 1,00,000 20,000 84,000
8,000 5 5,000 4,000 80,000 4,000 81,000
(iii) Number of orders which the company should place to minimize the costs after taking EOQ also into
consideration is 20 orders each of size 2,000 kg. The total cost of procurement and storage in this case
comes to ` 40,000, which is minimum. (Refer to working notes 3 and 4)
Q-34 MM Ltd. has provided the following information about the items in its inventory.
Item Code Number Units Unit Cost (`)
101 25 50
102 300 01
103 50 80
104 75 08
105 225 02
106 75 12
MM Ltd. has adopted the policy of classifying the items constituting 15% or above of Total Inventory
Cost as ‘A’ category, items constituting 6% or less of Total Inventory Cost as ‘C’ category and the remaining
items as ‘B’ category.
(i) Rank the items on the basis of % of Total Inventory Cost.
(ii) Classify the items into A, B and C categories as per ABC Analysis of Inventory Control adopted by
MM Ltd.

Ans. (i) Statement of Total Inventory Cost and Ranking of items

Item Units % of Total Unit Total % of Total Ranking
code no. units cost Inventory cost Inventory cost
(`) (`)
101 25 3.33 50 1,250 16.67 2
102 300 40.00 1 300 4.00 6
103 50 6.67 80 4,000 53.33 1
104 75 10.00 8 600 8.00 4
105 225 30.00 2 450 6.00 5
106 75 10.00 12 900 12.00 3
750 100 153 7,500 100
(ii) Classifying items as per ABC Analysis of Inventory Control
Basis for ABC Classification as % of Total Inventory Cost
15% & above — ‘A’ items
7% to 14% — ‘B’ items
6% & Less — ‘C’ items
Ranking Item code % of Total Total Inventory % of Total Category
No. units cost (`) Inventory Cost
1 103 6.67 4,000 53.33

2 101 3.33 1,250 16.67
Total 2 10.00 5,250 70.00 A
3 106 10.00 900 12.00
4 104 10.00 600 8.00
Total 2 20.00 1,500 20.00 B
5 105 30.00 450 6.00
6 102 40.00 300 4.00
Total 2 70.00 750 10.00 C
Grand Total 6 100 7,500 100
Q-35 GHI Ltd. manufactures ‘Stent’ that is used by hospitals in heart surgery. As per the estimates provided
by Pharmaceutical Industry Bureau, there will be a demand of 40 Million ‘Stents’ in the coming year.
GHI Ltd. is expected to have a market share of 2.5% of the total market demand of the Stents in the
coming year. It is estimated that it costs ` 1.50 as inventory holding cost per stent per month and that
the set -up cost per run of stent manufacture is ` 225.
Required:
(i) What would be the optimum run size for Stent manufacture?
(ii) What is the minimum inventory holding cost?
(iii) Assuming that the company has a policy of manufacturing 4,000 stents per run, how much extra
costs the company would be incurring as compared to the optimum run suggested in (i) above?
Ans. (i) Computation of Optimum Run size of ‘Stents’ or Economic Batch Quantity (EBQ)
2DS
Economic Batch Quantity (EBQ) =
C

Where, D = Annual demand for the Stents

= 4,00,00,000 × 2.5% = 10,00,000 units
S = Set- up cost per run
= ` 225
C = Carrying cost per unit per annum
= ` 1.50 × 12 = ` 18
2  10,00,000 `225
EBQ =
18
= 5,000 units of Stents
(ii) Minimum inventory holding cost
Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per annum
= (5,000 ÷ 2) × ` 18
= ` 45,000
(iii) Calculation of the extra cost due to manufacturing policy
When run size is 4,000 When run size is 5,000
units units i.e. at EBQ
10,00,000 10,00,000
Total set up cost x ` 225 x ` 225
4,000 4,000
= ` 56,250 = ` 45,000
Total Carrying cost ½ × 4,000 × ` 18 ½ × 5,000 × ` 18
= ` 36,000 = ` 45,000
Total Cost ` 92,250 ` 90,000
Extra cost = ` 92,250 - ` 90,000 = ` 2,250
Q-36 An automobile company purchases 27,000 spare parts for its annual requirements. The cost per order is
` 240 and the annual carrying cost of average inventory is 12.5%. Each spare part costs ` 50.
At present, the order size is 3,000 spare parts.
(Assume that number of days in a year = 360 days)
Find out:
(i) How much the company’s cost would be saved by opting EOQ model?
(ii) The Re-order point under EOQ model if lead time is 12 days.
(iii) How frequently should orders for procurement be placed under EOQ model?
Ans. Working Notes:
Annual requirement (A) = 27,000 units
Cost per order (O) = ` 240
Inventory carrying cost (i) = 12.5%
Cost per unit of spare (c) = ` 50
Carrying cost per unit (i × c) = ` 50 × 12.5% = ` 6.25

2 A  O
Economic Order Quantity (EOQ) =
i c
2  27,000  240
= 1440 units
6.25
(i) Calculation of saving by opting EOQ:
Existing Order policy EOQ Model
No. of orders 9 18.75 or 19
 27,000   27,000 
 3,000   1,440 
   
A. Ordering Cost (`) 2,160 4,500
  27,000  
(` 240 × 9)  `240   
  1,440  
B. Carrying cost (`) 9,375 4,500
 3,000 `6.25   1,440 `6.25 

   
 2   2 
Total cost (A+B) (‘) 11,535 9,000
Savings of Cost by opting EOQ Model = ` 11,535 – ` 9,000 = ` 2,535
(ii) Re-order point under EOQ:
Re-order point/ Re-order level = Maximum consumption × Maximum lead time
27,000 units
Consumption per day = = 75 units
360 days
Re-order point/ Re-order level = 75 units × 12 days = 900 units
(iii) Frequency of Orders (in days):
360 days 360 days

= = 18.95 days or 19 days
No.of orders a year 19
Q-37 The following data are available in respect of material X for the year ended 31st March, 2021:
(` )
Opening stock 9,00,000
Purchases during the year 1,70,00,000
Closing stock 11,00,000
(i) CALCULATE:
(a) Inventory turnover ratio, and
(b) The number of days for which the average inventory is held.
(ii) INTERPRET the ratio calculated as above if the industry inventory turnover rate is 10.

Ans.(i) (a) Inventory turnover ratio (Refer to working note)

= Cost of stock of raw material consumed
Average stock of raw material
= ` 1,68,00,000 = 16.8
` 10,00,000
(b) Average number of days for which the average inventory is held
365 365 days
= = = 21.73 days
Inventory turnover ratio 16.8
Working Note :
Particulars (`)
Opening stock of raw material 9,00,000
Add: Material purchases during the year 1,70,00,000
Less: Closing stock of raw material 11,00,000
1,68,00,000
(ii) The Inventory turnover ratio for material X is 16.8 which mean an inventory item takes only 21.73 or 22
days to issue from stores for production process. The rate is better than the industry rate which is 10
time or 36.5 days. This inventory turnover ratio indicates better inventory management system and
good demand for the final product in market.
Q-38 A Ltd. produces a product ‘X’ using a raw material ‘D’. To produce one unit of X, 4 kg of D is required. As
per the sales forecast conducted by the company, it will be able to sale 20,000 units of X in the coming
year.
The following are the information related to the raw material D:
(v) The purchase price is ` 250 per kg.
There is an opening stock of 1,800 units of the finished product X.
The carrying cost of inventory is 14% p.a.
To place an order company has to incur ` 1,340 on paper and documentation work.
From the above information FIND OUT the followings in relation to raw material D:
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
Ans. Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material ‘D’:
Sales forecast of the product ‘X’ 20,000 units
Less: Opening stock of ‘X’ 1,800 units
Fresh units of ‘X’ to be produced 18,200 units

Raw material required to produce 18,200 units of ‘X’ 72,800 kg.

(18,200 units × 4 kg.)
Less: Opening Stock of ‘D’ 2,000 kg.
Annual demand for raw material ‘D’ 70,800 kg.
2  Annual demand of 'D'  Ordering cost

EOQ =
2  70,800 kg.  `1,340 2  70,800 kg.  `1,340

= = = 2,328 kg.
`250  14% `35
(iv) Minimum consumption per day of raw material ‘D’:

So Minimum consumption per day will be
Average Consumption = Min.consumption+Max.consumption
2
Or, 236 kg. = Min.consumption + 276 kg.
2
(a) Re-order Quantity :
EOQ – 400 kg. = 2,328 kg. – 400 kg.= 1,928 kg.
= 2,208 kg. + 1,928 kg. – (196 kg. × 4 days) = 4,136 kg. – 784 kg. = 3,352 kg.
= 2,208 kg. – (236 kg. × 6 days) = 792 kg.


II No. of orders a
year
III Ordering Cost 37 orders × ` 1,340 31 orders × ` 1,340

= ` 49,580 = ` 41,540
IV Average
Inventory
V Carrying Cost 964 kg. × ` 35 = ` 33,740 1,164 kg. × ` 35 = ` 40,740

VI Total Cost ` 83,320 ` 82,280
Extra Cost incurred due to not ordering EOQ = `83,320 - ` 82,280 = ` 1,040
Q-39 State how the following items are treated in arriving at the value of cost of material purchased:
(i) Detention Charges/Fines
(ii) Demurrage
(iii) Cost of Returnable containers
(iv) Central Goods and Service Tax (CGST)
(v) Shortage due to abnormal reasons.
Ans.(a) Treatment of items in arriving at the value of cost of material Purchased
S. No. Items Treatment
(i) Detention charges/Fine Detention charges/ fines imposed for noncompliance
of rule or law by any statutory authority.
It is an abnormal cost and not included with cost of
purchase.
(ii) Demurrage Demurrage is a penalty imposed by the transporter
for delay in uploading or offloading of materials. It is
an abnormal cost and not included with cost of
purchase.
(iii) Cost of returnable Treatment of cost of returnable containers are as
containers follows:
Returnable Containers: If the containers are
returned and their costs are refunded, then cost of
containers should not be considered in the cost of
purchase.

If the amount of refund on returning the container is

less than the amount paid, then, only the short fall
is added with the cost of purchase.
(iv) Central Goods and Central Goods and Service Tax (CGST) is paid on
Service Tax (CGST) manufacture and supply of goods and collected
from the buyer. It is excluded from the cost of
purchase if the input credit is available for the
same. Unless mentioned specifically CGST is not
added with the cost of purchase.
(v) Shortage due to Shortage arises due to abnormal reasons such as
abnormal reasons material mishandling, pilferage, or due to any
avoidable reasons are not absorbed by the good
units. Losses due to abnormal reasons are debited
to costing profit and loss account.
Q-40 Write a short note on VED analysis of Inventory Control .

Ans Vital, Essential and Desirable (VED): Under this system of inventory analysis, inventories are classified
on the basis of its criticality for the production function and final product. Generally, this classification
is done for spare parts which are used for production.
(i) Vital- Items are classified as vital when its unavailability can interrupt the production process and
cause a production loss. Items under this category are strictly controlled by setting re-order level.
(ii) Essential- Items under this category are essential but not vital. The unavailability may cause sub
standardisation and loss of efficiency in production process.
Items under this category are reviewed periodically and get the second priority.
(iii) Desirable- Items under this category are optional in nature; unavailability does not cause any
production or efficiency loss.
Q-41 Sky & Co., an unregistered supplier under GST, purchased material from Vye Ltd. which is registered
under GST. The following information is available for one lot of 5,000 units of material purchased:
Listed price of one lot ` 2,50,000
Trade discount @ 10% on listed price
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Cash discount @ 10%
(Will be given only if payment is made within 30 days.)
Toll Tax paid ` 5,000
Freight and Insurance ` 17,000
Demurrage paid to transporter ` 5,000
Commission and brokerage on purchases ` 10,000
Amount deposited for returnable containers ` 30,000
Amount of refund on returning the container ` 20,000
Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons.
The payment to the supplier was made within 21 days of the purchases.

You are required to CALCULATE cost per unit of material purchased by Sky & Co.
Ans. Calculation of cost per unit:
Particulars Units (`)
Listed Price of Materials 5,000 2,50,000
Less: Trade discount @ 10% on invoice price (25,000)
2,25,000
Add: CGST @ 6% of ` 2,25,000 13,500
Add: SGST @ 6% of ` 2,25,000 13,500
2,52,000
Add: Toll Tax 5,000
Freight and Insurance 17,000
Commission and Brokerage Paid 10,000
Add: Cost of returnable containers:
Amount deposited ` 30,000
Less: Amount refunded ` 20,000 10,000
2,94,000
Add: Other Expenses @ 2% of Total Cost (` 2,94,000/98×2) 6,000
Total cost of material 3,00,000
Less: Shortage material due to normal reasons @ 20% 1,000 -
Total cost of material of good units 4,000 3,00,000
Cost per unit (` 3,00,000/4,000 units) 75
Note:
1. GST is payable on net price i.e., listed price less discount.
2. Cash discount is treated as interest and finance charges; hence it is ignored.
3. Demurrage is penalty imposed by the transporter for delay in uploading or off-loading of materials. It
is an abnormal cost and not included.
4. Shortage due to normal reasons should not be deducted from cost to ascertain total cost of good units.
Q-42 XYZ Ltd. uses two types of raw materials – ‘Material A’ and ‘Material B’ in the production process and
has provided the following data for the year ended on 31st March, 2021:
Particulars Material A Material B
(`) (`)
Opening stock as on 01.04.2020 30,000 32,000
Purchase during the year 90,000 51,000
Closing stock as on 31.03.2021 20,000 14,000
(i) You are required to calculate:
(a) The inventory turnover ratio of ‘Material A’ and ‘Material B’.
(b) The number of days for which the average inventory is held for both materials ‘A’ and ‘B’.
(ii) Based on above calculations, give your comments.
(Assume 360 days in a year.)

Ans.
(i) Calculation of Inventory Turnover ratios and number of days:
Material A (`) Material B (`)
Opening stock 30,000 32,000
Add: Purchases 90,000 51,000
1,20,000 83,000
Less: Closing stock 20,000 14,000
Materials consumed 1,00,000 69,000
Average inventory: (Opening Stock + Closing Stock)  2 25,000 23,000
(a) Inventory Turnover ratio: (Consumption  Average inventory) 4 times 3 times
(b) Number of days for which the average inventory held
(Number of Days in a year/IT ratio) 90 days 120 days
(ii) Comments: Material A is moving faster than Material B. Or Material A has a less holding period.
Q-43 What is Bill of Material? Describe the uses of Bill of Material in following departments:
(i) Purchases Department
(ii) Production Department
(iii) Stores Department
(iv) Cost/Accounting Department
Ans. Bill of Material: It is a detailed list specifying the standard quantities and qualities of materials and
components required for producing a product or carrying out of any job.
Uses of Bill of Material in different department:
Purchase Production Stores Cost/ Accounting
Department Department Department Department
Materials are Production is planned It is used as a It is used to estimate
procured according to the nature, reference document cost and profit. Any purchase,
(purchased) on volume of the materials while issuing materials issue and usage are compared/
the basis of required to be used. to the requisitioning verified against this document.
specifications Accordingly, material department.
mentioned in it. requisition lists are
prepared.
Purchase Department Production Department Stores Department Cost/ Accounting Department
Materials are procured (purchased) on the basis of specifications mentioned in it.
Production is planned according to the nature, volume of the materials required to be used. Accordingly,
material requisition lists are prepared.
It is used as a reference document while issuing materials to the requisitioning department.
It is used to estimate cost and profit. Any purchase, issue and usage are compared/ verified against this
document.
Q-44 M/s SE Traders is a distributor of an electronic items. A periodic inventory of electronic items on hand
is taken when books are closed at the end of each quarter. The following information is available for
the quarter ended on 30th September, 2021:
Sales ` 2,19,30,000
Opening Stock 12,500 units @ ` 600 per unit
Administrative Expenses ` 5,62,500

Purchases (including freight inward):

- July 1, 2021 25,000 units @ ` 573 per unit
- September 30, 2021 12,500 units @ ` 630 per unit
Closing stock- September 30, 2021 16,000 units
You are required to COMPUTE the following by WAM (Weighted Average Method), FIFO method and
LIFO method assuming issue/ consumption pattern was even throughout the quarter:
(i) Value of Inventory on 30th September, 2021.
(ii) Profit or loss for the quarter ended 30th September, 2021.
Ans.
(i) Computation of Value of Inventory as on 30th September 2021:
Date Particulars Units WAM (`) FIFO (`) LIFO (`)
01-07-21 Opening Stock 12,500 75,00,000 75,00,000 75,00,000
(`600×12,500) (`600×12,500) (`600×12,500)
01-07-21 Purchases 25,000 1,43,25,000 1,43,25,000 1,43,25,000
(`573×25,000) (`573×25,000) (`573×25,000)
30-09-21 Purchases 12,500 78,75,000 78,75,000 78,75,000
(`630×12,500) (`630×12,500) (`630×12,500)
01-07-21 Issues/ Consumption
to 30-09-21 (Balancing figure) 34,000 2,01,96,000* 1,98,19,500** 2,01,94,500***
30-09-21 Closing Stock 16,000 95,04,000 98,80,500 95,05,500
Weighted average rate =
* ` 594 x 34,000 = ` 2,01,96,000

** ` 600 × 12,500 + ` 573 × 21,500 = ` 1,98,19,500
*** ` 630 × 12,500 + ` 573 × 21,500 = ` 2,01,94,500
(ii) Computation of Profit or Loss for the Quarter ended 30th September 2021
Particulars WAM (`) FIFO (`) LIFO (`)
Sales 2,19,30,000 2,19,30,000 2,19,30,000
Less: Consumption 2,01,96,000 1,98,19,500 2,01,94,500
Less: Administrative Exp. 5,62,500 5,62,500 5,62,500
Profit or Loss 11,71,500 15,48,000 11,73,000
Q-45 SKY Company Ltd., not registered under GST, purchased material ‘RPP’ from a company, registered
under GST. The following information is available for one lot of 5,000 units of material purchased:
Listed price of one lot ` 7,50,000
Trade discount @ 10% on Listed price.
CGST and SGST (Credit Not available) 12% (6% CGST + 6% SGST)
Road Tax paid ` 15,000
Freight and Insurance ` 51,000
Detention Charges ` 15,000
Commission and brokerage on purchases ` 30,000
Amount deposited for returnable containers ` 90,000

Amount of refund on returning the container ` 60,000

Other Expenses @ 2% of total cost
20% of material shortage is due to normal reasons.
You are required to CALCULATE cost per unit of material purchased to SKY Company Ltd.
Ans. Computation of Total cost of material purchased of SKY Manufacturing Company
Particulars Units (Amount in `)
Listed Price of Materials 5,000 7,50,000
Less: Trade discount @ 10% on invoice price (75,000)
6,75,000
Add: CGST @ 6% of ` 6,75,000 40,500
SGST @ 6% of ` 6,75,000 40,500
7,56,000
Add: Road Tax paid 15,000
Freight and Insurance 51,000
Commission and Brokerage Paid 30,000
Add: Cost of returnable containers: Amount deposited ` 90,000
Less: Amount refunded ` 60,000 30,000
8,82,000
Add: Other Expenses @ 2% of Total Cost (8,82,00098×2) 18,000
Total cost of material 9,00,000
Less: Shortage due to Normal Loss @ 20% 1,000 -
Total cost of material of good units 4,000 9,00,000
Cost per unit (` 9,00,000/4,000 units) 225
Notes:
1. GST is payable on net price i.e., listed price less discount.
2. Detention charges/ fines imposed for non-compliance of rule or law by any statutory authority. It is an
abnormal cost and not included with cost of purchase.
3. Shortage due to normal reasons should not be deducted from cost to ascertain total cost of good units.
---0---0---


CHAPTER-3
EMPLOYEE COST AND DIRECT EXPENSES
Q-1 From the following information, CALCULATE employee turnover rate using – (i) Separation Method, (ii)
Replacement Method, (iii) New Recruitment Method, and (iv) Flux Method:
No. of workers as on 01.01.2019 = 3,600
No. of workers as on 31.12.2019 = 3,790
During the year, 40 workers left while 120 workers were discharged. 350 workers were recruited during
the year, of these 150 workers were recruited because of exits and the rest were recruited in accordance
with expansion plans.
Ans. Employee turnover rate using:
(i) Separation Method:
No. of workers left + No. of workers discharged
= ×100
Average number of workers
 40 + 120  160
= 3,600 + 3,790 /2 ×100 = 3,895 ×100 = 4.33%
 
(ii) Replacement Method:
No. of workers replaced 150
= ×100 = = 4,06%
Average number of workers 3,695
(iii) New Recruitment Method:
No. of workers newly recruited
= ×100
Average number of wor kers
No. Recruitments - No. of Replacements

= ×100
350 -150 200

= ×100 = ×100 = 5.41%
3,695 3,695
(iv) Flux Method:
No. of separations + No. of accessions
= ×100
160 + 350  510

=  3,600 + 3,790  /2 ×100 = 3,695 ×100 = 13.80%

Q-2 ADV Pvt. Ltd. manufactures a product which requires skill and precision in work to getquality products.
The company has been experiencing high labour cost due to slow speedof work. The management of
the company wants to reduce the labour cost but without compromising with the quality of work. It
wants to introduce a bonus scheme but is indifferent between the Halsey and Rowan scheme of bonus.
For the month of November 2019, the company budgeted for 24,960 hours of work. The workers are
paid ‘80 per hour.
Required:
(i) CALCULATE and suggest the bonus scheme where the time taken (in %) to time allowed to complete
the works is (a) 100% (b) 75% (c) 50% & (d) 25% of budgeted hours.
Ans. The Cost of labour under the bonus schemes are tabulated as below:
Time Time Wages (`) Bonus (`) Total Wages (`) Earning per hour(`)
Allowed taken Halsey* Rowan** Halsey Rowan Halsey Rowan
(1) (2) (3) (4) (5) (6) (7) (8) (9)
= (2) × ` 80 = (3) + (4) = (3) + (5) = (6)/(2) = (7)/(2)
24,960 24,960 19,96,800 - -19,96,800 19,96,800 80.00 80.00
24,960 18,720 14,97,600 2,49,600 3,74,400 17,47,200 18,72,000 93.33 100.00
24,960 12,4809, 98,400 4,99,200 4,99,200 14,97,600 14,97,600 120.00 120.00
24,960 6,240 4,99,200 7,48,800 3,74,400 12,48,000 8,73,600 200.00 140.00
* Bonus under Halsey Plan = 50% of (Time Allowed – Time Taken) × Rate per hour
Time taken
** Bonus under Rowan Plan = × Time saved×Rarte per hour
Time allowed
Rowan scheme of bonus keeps checks on speed of work as the rate of incentive increases only upto 50% of
time taken to time allowed but the rate decreases as the time taken to time allowed comes below 50%. It
provides incentives for efficient workers for saving in time but also puts check on careless speed. On
implementation of Rowan scheme, the management of ADV Pvt. Ltd. would resolve issue of the slow speed
work while maintaining the skill and precision required maintaining the quality of product.
Q-3 Zico Ltd. has its factory at two locations viz Nasik and Satara. Rowan plan is used at Nasik factory and
Halsey plan at Satara factory. Standard time and basic rate of wages are same for a job which is similar
and is carried out on similar machinery. Normal working hours is 8 hours per day in a 5 day week.
Job in Nasik factory is completed in 32 hours while at Satara factory it has taken 30 hours. Conversion
costs at Nasik and Satara are ` 5408 and ` 4950. Overheads account for ` 25 per hour.
Required:
(i) To find out the normal wage; and
(ii) To compare the respective conversion costs.
-58- Chapter-3 : Employee Cost

Ans.
Particulars Nasik Satara
Hours worked 32 hr. 30 hr.
Conversion Costs ` 5,408 ` 4,950
Less: Overheads ` 800 ` 750
(` 25×32 hr.) (` 25×30 hr.)
Labour Cost ` 4,608 ` 4,200
(i) Finding of Normal wage rate:
Let Wage rate be ‘R per hour, this is same for both the Nasik and Satara factory.
Normal wage rate can be found out taking total cost of either factory.
Nasik: Rowan Plan
Total Labour Cost = Wages for hours worked + Bonus as per Rowan plan
 Time saved 
` 4,608 = Hours worked × Rate per hour +  ×Hours worked×Rate per hour) 
 Time allowed 
 40 - 32 
Or, ` 4,608 = 32 hr. × R +  × 32 ×R 
 40 
Or, ` 4,608 = 32R + 6.4R
R = ` 120
Normal wage = 32 hrs × ` 120 = ` 3,840
OR
Satara: Halsey Plan
Total Labour Cost = Wages for hours worked + Bonus as per Halsey plan
` 4,200 = Hours worked × Rate per hour + (50%×Hours saved×Rate per hour)
` 4,200 = 30 hr. × R + 50% × (40 hr. – 30 hr.) × R
` 4,200 = 35 R
Or R = ` 120
Normal Wage = 30 hrs × ` 120 = ` 3,600
(ii) Comparison of conversion costs:
Particulars Nasik (`) Satara (`)
Normal Wages (32 x 120) 3,840
(30x120) 3,600
Bonus (6.4 x 120) 768
(5 x 120) 600
Overhead 800 750
5,408 4,950

Q-4 A Company is undecided as to what kind of wage scheme should be introduced. The following particulars
have been compiled in respect of three workers. Which are under consideration of the management.
I II III
Actual hours worked 380 100 540
Hourly rate of wages (in `) 40 50 60
Productions in units:
- Product A 210 - 600
- Product B 360 - 1350
- Product C 460 250 -
Standard time allowed per unit of each product is:
A B C
Minutes 15 20 30
For the purpose of piece rate, each minute is valued at ` 1/-
You are required to CALCULATE the wages of each worker under:
(i) Guaranteed hourly rate basis
(ii) Piece work earning basis, but guaranteed at 75% of basic pay (Guaranteed hourly rate if his earnings
are less than 50% of basic pay.)
(iii) Premium bonus basis where the worker received bonus based on Rowan scheme.
Ans.
(i) Computation of wages of each worker under guaranteed hourly rate basis
Worker Actual hours Hourly wage rate Wages (`)
worked (Hours) (`)
I 380 40 15,200
II 100 50 5,000
III 540 60 32,400
(ii) Computation of Wages of each worker under piece work earning basis
Product Piece rate Worker-I Worker-II Worker-III
per unit (`) Units Wages (`) Units Wages (`) Units Wages
(` )
A 15 210 3,150 - - 600 9,000
B 20 360 7,200 - - 1,350 27,000
C 30 460 13,800 250 7,500 - -
Total 24,150 7,500 36,000
Since each worker’s earnings are more than 50% of basic pay. Therefore, worker -I, II and III will be paid the
wages as computed i.e. ` 24,150, ` 7,500 and ` 36,000 respectively.
Working Notes :
1. Piece rate per unit
Product Standard time per Piece rate each Piece rate per
unit in minute minute (`) unit (`)
A 15 1 15
B 20 1 20
C 30 1 30

2. Time allowed to each worker

Worker Product-A Product-B Product-C Total Time (Hours)
I 210 units × 15 360 units × 20 460 units × 30 24,150/60
= 3,150 = 7,200 = 13,800 = 402.50
II - - 250 units × 30 7,500/60
= 7,500 = 125
III 600 units × 15 1, 350 units × 20 - 36,000/60
= 9,000 = 27,000 = 600
(iii) Computation of wages of each worker under Premium bonus basis (where each worker receives bonus
based on Rowan Scheme)
Worker Time Time Time Wage Earnings Bonus Total
Allowed Taken saved Rate per (` ) (`)* Earning
(Hr.) (Hr.) (Hr.) hour (`) (` )
I 402.5 380 22.5 40 15,200 850 16,050
II 125 100 25 50 5,000 1,000 6,000
III 600 540 60 60 32,400 3,240 35,640
* TimeTaken x Time Saved x Wage Rate
Time Allowed
380
Worker-I = x 22.5 x 40 = 850
0
402.5
100
Worker-II = x 25 x 50 = 1,000
125
540
Worker-III = x 60 x 60 = 3,240
600
Q-5 A job can be executed either through workman A or B. A takes 32 hours to complete the job while B
finishes it in 30 hours. The standard time to finish the job is 40 hours.
The hourly wage rate is same for both the workers. In addition workman A is entitled to receive bonus
according to Halsey plan (50%) sharing while B is paid bonus as per Rowan plan. The works overheads
are absorbed on the job at ` 7.50 per labour hour worked. The factory cost of the job comes to ` 2,600
irrespective of the workman engaged.
INTERPRET the hourly wage rate and cost of raw materials input. Also show cost against each element
of cost included in factory cost.
Ans. Calculation of :
1. Time saved and wages:
Workmen A B
Standard time (hrs.) 40 40
Actual time taken (hrs.) 32 30
Time saved (hrs.) 8 10
Wages paid @ ` x per hr. (`) 32x 30x
2. Bonus Plan:
Halsey Rowan
Time saved (hrs.) 8 10
Bonus (`) 4x 7.5x
 8 hrs  ` x   10 hrs 
 2   40 hrs  30hrs  ` x 
   

3. Total wages:
Workman A: 32x + 4x = ` 36x
Workman B: 30x + 7.5x = ` 37.5x
Statement of factory cost of the job
Workmen A (`) B (`)
Material cost (assumed) y y
Wages (shown above) 36x 37.5x
Works overhead 240 225
Factory cost (given) 2,600 2,600
The above relations can be written as follows:
36x + y + 240 = 2,600 (i)
37.5x+ y+ 225 = 2,600 (ii)
Subtracting (i) from (ii) we get
1.5x – 15 = 0
Or, 1.5 x = 15
Or, x = ` 10 per hour
On substituting the value of x in (i) we get y = ` 2,000
Hence the wage rate per hour is ` 10 and the cost of raw material is ` 2,000 on the job.
Q-6 Jyoti Ltd. wants to ascertain the profit lost during the year 2017-18 due to increased labour turnover. For
this purpose, it has given you the following information:
(1) Training period of the new recruits is 50,000 hours. During this period their productivity is 60% of
the experienced workers. Time required by an experienced worker is 10 hours per unit.
(2) 20% of the output during training period was defective. Cost of rectification of a defective unit
was ` 25.
(3) Potential productive hours lost due to delay in recruitment were 1,00,000 hours.
(4) Selling price per unit is ` 180 and P/V ratio is 20%.
(5) Settlement cost of the workers leaving the organization was ` 1,83,480.
(6) Recruitment cost was ` 1,56,340
(7) Training cost was ` 1,13,180
Required:
CALCULATE the profit lost by the company due to increased labour turnover during the year 2017-18.
50,000
Ans. Output by experienced workers in 50,000 hours = = 5,000 units
10
 Output by new recruits = 60% of 5,000 = 3,000 units
Loss of output = 5,000 – 3,000 = 2,000 units
Total loss of output = Due to delay recruitment + Due to inexperience
= 10,000 + 2,000 = 12,000 units
Contribution per unit = 20% of `180 = ` 36
Total contribution lost = `36 × 12,000 units = ` 4,32,000
Cost of repairing defective units = 3,000 units × 0.2 × ` 25 = ` 15,000
Profit forgone due to labour turnover

(` )
Loss of Contribution 4,32,000
Cost of repairing defective units 15,000
Recruitment cost 1,56,340
Training cost 1,13,180
Settlement cost of workers leaving 1,83,480
Profit forgone in 2017-18 9,00,000
Q-7 M/s Zeba Private Limited allotted a standard time of 40 hours for a job and the rate per hour is ` 75. The
actual time taken by a worker is 30 hours.
You are required to calculate the total earnings under the following plans:
(i) Halsey Premium Plan (Rate 50%) (ii) Rowan Plan
(iii) Time Wage System (iv) Piece Rate System
(v) Emerson Plan
Ans.
(i) Halsey Premium plan :
1
= (Time taken × Rateper hour) + ( × Time saved × Rate per hour)
2
1
= (30 hours × ` 75) + ( × 10 hours × ` 75)
2
= ` 2,250 + ` 375 = ` 2,625
(ii) Rowan Premium plan :
Time saved
= (Time taken × Rateper hour) + ( × Time saved × Rate per hour)
Time allowed
10
= (30 hours × ` 75) + ( × 30 × ` 75)
40
= ` 2,250 + ` 375 = ` 2,625
= ` 2,250 + ` 562.5 = ` 2,812.5 or ` 2,813
(iii) Time wage system :
= T ime taken × Rate per hour
= 30 × ` 75 = ` 2,250
(iv) Piece Rate System :
= Std. T ime × Rate per hour
= 40 × ` 75 = ` 3,000
(v) Emerson plan :
Efficiency level = 40/30 = 133.33%
Time taken × (120% + 33.33%) of Rate
= 30 hours × 153.33% of ` 75 = ` 3,450
Q-8 Explain Direct Expenses and how these are measured and their treatment in cost accounting.
Ans. Direct Expense: Expenses other than direct material cost and direct employee cost, which are incurred
to manufacture a product or for provision of service and can be directly traced in an economically
feasible manner to a cost object. The following costs are examples for direct expenses:

(i) Royalty paid/ payable for production or provision of service;

(ii) Hire charges paid for hiring specific equipment;
(iii) Cost for product/ service specific design or drawing;
(iv) Cost of product/ service specific software;
(v) Other expenses which are directly related with the production of goods or provisionof service.
The above list of expenses is not exhaustive; any other expenses which are directly attributable to the
production or service are also included as direct expenses.
Measurement of Direct Expenses
The direct expenses are measured at invoice or agreed price net of rebate or discount but includes
duties and taxes (for which input credit not available), commission and other directly attributable
costs.
In case of sub-contracting, where goods are get manufactured by job workers independent of the
principal entity, are measured at agreed price. Where the principal supplies some materials to the job
workers, the value of such materials and other incidental expenses are added with the job charges
paid to the job workers.
Treatment of Direct Expenses
Direct Expenses forms part the prime cost for the product or service to which it can be directly traceable
and attributable. In case of lump-sum payment or one time payment, the cost is amortised over the
estimated production volume or benefit derived. If the expenses incurred are of insignificant amount
i.e. not material, it can be treated as part of overheads.
Q-9 Following data have been extracted from the books of M/s. ABC Private Limited:
(i) Salary (each employee, per month) ` 30,000
(ii) Bonus 25% of salary
(iii) Employer's contribution to PF, ESI etc. 15% of salary
(iv) Total cost at employees' welfare activities ` 6,61,500 per annum
(v) Total leave permitted during the year 30 days
(v) No. of employees 175
(vii) Normal idle time 70 hours per annum
(viii) Abnormal idle time (due to failure of power supply) 50 hours
(ix) Working days per annum 310 days of 8 hours
1. Annual cost of each employee
2. Employee cost per hour
3. Cost of abnormal idle time, per employee
Ans.
1.
Annual cost of each employee `
1. Salary (30,000×12) 3,60,000
2. Bonus (25% of Salary) 90,000
3. Employees Contribution to PF (15% of Salary) 54,000
4. Employers welfare (661500/175) 3,780
Total Annual Cost 5,07,780

2.
Effective Working hours (310 days × 8 hours) 2480 hours
Less: Leave days (30 days × 8 hours) 240 hours*
Available Working hours 2240 hours
Less: Normal Loss @ 70 hours
2170 hours
507780
Employee Cost per hour = ` 234
2170
*It is assumed 310 working days are without taking leave permitted into consideration
3. Cost of abnormal idle time per employee = ` 234× 50 hours= ` 11700
Alternative solution for Part (2) and (3)
(2) Calculation of Employee cost per hour:
Working hours per annum 2,480 *
Less: Normal Idle time hours 70
Effective hours 2,410
Employee cost 5,07,780
Employee cost per hour 210.70
*It is assumed 310 working days are after adjusting leave permitted during the year.
(3) Cost of Abnormal idle time per employee:
Abnormal Idle time hours 50
Employee cost per hour 210.70
Cost of Abnormal idle time (210.70 ×50) 10,534.85
Q-10 A worker takes 15 hours to complete a piece of work for which time allowed is 20 hours.
His wage rate is ` 5 per hour. Following additional informa tion are also available:
Material cost of work ` 50
Factory overheads 100% of wages
Calculate the factory cost of work under the following methods of wage payments:
(i) Rowan Plan
(ii) Halsey Plan
Ans.
`
(i) Rowan Plan : Normal time wage = 15 hours @ ` 5= 75
Bonus = Time saved /Time allowed × (Time taken × Time rate)
5
= x (15 x 5) 18.75
20
93.75
(ii) Halsey Plan: Normal time wage = 15 hours @ ` 5 = 75
Bonus = 50% of (Time saved x Time rate) = 50% of (5x5) = 12.5
87.5

Statement of Comparative Factory cost of work

Rowan Plan Halsey Plan
` `
Materials 50 50
Direct Wages 93.75 87.5
Prime Cost 143.75 137.5
Factory Overhead (100% of Direct wages) 93.75 87.5
Factory Cost 237.5 225
Q-11 The information regarding number of employees on roll in a shopping mall for the month of December
2017 are given below:
Number of employees as on 01-12-2017 900
Number of employees as on 31-12-2017 1100
During December, 2017, 40 employees resigned and 60 employees were discharged.
300 employees were recruited during the month. Out of these 300 employees, 225 employees were
recruited for an expansion project of the mall and rest were recruited due to exit of employees.
Assuming 365 days in a year, calculate Employee Turnover Rate and Equivalent Annual' Employee
Turnover Rate by applying the following:
(i) Replacement Method
(ii) Separation Method
(iii) Flux Method
Ans. Labour turnover rate:
It comprises of computation of labour turnover by using following methods:
(i) Replacement Method:
Labour turnover rate = No. of workers replaced x 100
75
= x 100 = 7.5%
100
7.5  365
Equivalent Annual Turnover Rate = 88.31%
31
(ii) Separation Method:
Labour turnover rate = No. of workers left + No. of workers discharged × 100
(40 + 60) 100
=  100 =  100 = 10%
(900 + 1100  2) 1,000
10 x 365
Equivalent Annual Turnover Rate = = 117.74%
31
(iii) Flux Method:
Labour turnover rate = No. of separations + No. of accessions × 100
(100 + 300) 400
=  100 =  100 = 40%
(900 + 1100  2) 1,000
40  365
Equivalent Annual Turnover Rate =  470.97%
31

OR
(iii) Flux Method:
Labour turnover rate = No. of separation + No. of replaced × 100
100 + 75
 100 = 17.5%
1000
17.5 x 365
Equivalent Annual Turnover Rate = = 206.05%
31
Q-12 A, B and C are three industrial workers working in Sports industry and are experts in making cricket
pads. A, B and C are working in Mahi Sports, Virat Sports and Sikhar Sports companies respectively.
Workers are paid under different incentive schemes. Company wise incentive schemes are as follows:
Company Incentive scheme
Mahi Sports Emerson’s efficiency system
Virat Sports Merrick differential piece rate system
Sikhar Sports Taylor’s differential piece work system
The relevant information for the industry is as under:
Standard working hours 8 hours a day
Standard output per hour (in units) 2
Daily wages rate Rs. 360
No. of working days in a week 6 days
Actual outputs for the week are as follows:
A B C
132 units 108 units 96 units
You are required to calculate effective wages rate and weekly earnings of all the three workers.
Ans.
Calculation of effective wages rate and weekly earnings of the workers A, B and C
Workers A B C
Standard Output 96 units 96 units 96 units
(8 hrs. × 2 units × 6 days) (8 hrs. × 2 units × 6 days) (8 hrs. × 2 units × 6 days)
Actual Output 132 units 108 units 96 units

Efficiency (%) ×100= 137.5 ×100= 112.5 ×100= 100
Daily wages Rate Rs. 360 Rs. 360 Rs. 360
Incentive system Emerson’s Efficiency Merrick differential Taylor’s differential piece
System piece rate system work system
Rate of Bonus 57.5% of time rate 20% of ordinary piece 25% of ordinary piece rate
(20% + 37.5% ) rate
Effective Wage Rate Rs. 70.875 per hour Rs. 27 per piece Rs. 28.125 per piece
 Rs. 360   Rs. 360   Rs. 360 

 157.5%   120%   125% 
 8 hours   16 units   16 units 
Total weekly earnings Rs. 3,402 Rs. 2,916 Rs. 2,700
(8 hours × 6 days × (108 units × Rs. 27) (96 units × Rs. 28.125)
Rs.70.875)

Q-13 Discuss the accounting treatment of Idle time and overtime wages.
Ans. Accounting treatment of idle time wages & overtime wages in cost accounts: Normal idle time is
treated as a part of the cost of production. T hus, in the case of direct workers, an allowance for normal
idle time is built into the labour cos t rates. In the case of indirect workers, normal idle time is spread
over all the products or jobs through the process of absorption of factory overheads.
Under Cost Accounting, the overtime premium is treated as follows:
If overtime is resorted to at the desire of the customer, then the overtime premium may be charged to
the job directly.
If overtime is required to cope with general production program or for meeting urgent orders, the
overtime premium should be treated as overhead cost of particular depart ment or cost center which
works overtime.
Overtime worked on account of abnormal conditions should be charged to costing Profit & Loss Account.
If overtime is worked in a department due to the fault of another department the overtime premium
should be charged to the latter department.
Q-14 State : Direct Expenses with examples.
Ans. Expenses other than direct material cost and direct employee cost, which are incurred to manufacture
a product or for provision of service and can be directly traced in an economically feasible manner to a
co st object. T he following costs are examples for direct expenses:
(a) Royalty paid/ payable for production or provision of service;
(b) Hire charges paid for hiring specific equipment;
(c) Cost for product/ service specific design or drawing;
(d) Cost of product/ service specific software;
(e) Other expenses which are directly related with the production of goods or provision of service.
Q-15 Two workers ‘A’ and ‘B’ produce the same product using the same material. Their normal wage rate is
also the same. ‘A’ is paid bonus according to Rowan scheme while ‘B’ is paid bonus according to Halsey
scheme. The time allowed to make the product is 120 hours. ‘A’ takes 90 hours while ‘B’ takes 100 hours
to complete the product. The factory overhead rate is ` 50 per hour actually worked. The factory cost of
product manufactured by ‘A’ is ` 80,200 and for product manufactured by ‘B’ is ` 79,400.
Required:
(i) COMPUTE the normal rate of wages.
(ii) CALCULATE the material cost.
(iii) PREPARE a statement comparing the factory cost of the product as made by two workers.
Ans. Let x be the cost of material and y be the normal rate of wage/hour
Worker A (`) Worker B (`)
Material cost x x
Labour wages 90 y 100 y
Bonus Rowan system Halsey system
Time saved
 hour worked  rate Hours saved x 50% x rate
Time allowed
30 1
 90  y = 22.5y 20   y = 10 y
120 2
Overheads 90 x ` 50 = 4,500 100 x ` 50 = 5,000
Factory cost x + 112.5y + 4,500 = 80,200 x + 110y + 5,000 = 79,400
 x + 112.5y = 75,700……... (1)  x + 110y = 74,400…. (2)

Solving (1) and (2) we get x = `17,200 and y = ` 520

(i) Normal rate of wages is ` 520 per hour.
(ii) Cost of materials = ` 17,200.
(iii) Comparative Statement of factory cost
Worker A (` ) Worker B (` )
Material cost 17,200 17,200
Wages 46,800 52,000
(90 x ` 520) (100 x ` 520)
Bonus 11,700 5,200
 30   1 
  90  520   20 × × 520 
 120   2 
Overheads 4,500 5,000
(90 x ` 50) (100 x ` 50)
Factory cost 80,200 79,400
Q-16 Corrs Consultancy Ltd. is engaged in BPO industry. One of its trainee executives in the Personnel
department has calculated labour turnover rate 24.92% for the last year using Flux method.
Following is the some data provided by the Personnel department for the last year:
Employees At the beginning Joined Left At the end
Data Processors 540 1,080 60 1,560
Payroll Processors ? 20 60 40
Supervisors ? 60 --- ?
Voice Agents ? 20 20 ?
Assistant Managers ? 20 --- 30
Senior Voice Agents 4 --- --- 12
Senior Data Processors 8 --- --- 34
Team Leaders ? --- --- ?
Employees transferred from the Subsidiary Company
Senior Voice Agents --- 8 --- ---
Senior Data Processors --- 26 --- ---
Employees transferred to the Subsidiary Company
Team Leaders --- --- 60 ---
Assistant Managers --- --- 10 ---
At the beginning of the year there were total 772 employees on the payroll of the company. The
opening strength of the Supervisors, Voice Agents and Assistant Managers were in the ratio of 3 : 3 : 2.
The company has decided to abandon the post of Team Leaders and consequently all the Team Leaders
were transferred to the subsidiary company.
The company and its subsidiary are maintaining separate set of books of account and separate Personnel
Department.
You are required to CALCULATE:
(a) Labour Turnover rate using Replacement method and Separation method.
(b) Verify the Labour turnover rate calculated under Flux method by the trainee executive of the
Corrs Consultancy Ltd.
Ans. Working Notes:
(i) Calculation of no. of employees at the beginning and end of the year

At the Beginning At the end

of the year of the year
Data Processors 540 1,560
Payroll Processors [Left- 60 + Closing- 40 – Joined- 20] 80 40
Supervisors* 30 90
Voice Agents* 30 30
Assistant Managers* 20 30
Senior Voice Agents 4 12
Senior Data Processors 8 34
Team Leaders 60 0
Total 772 1,796
(*) At the beginning of the year:
Strength of Supervisors, Voice Agents and Asst. Managers =
[772 – {540 + 80 + 4 + 8 + 60} employees] or [772 – 692 = 80 employees]
3 3 2
[{Supervisors- 80 x = 30 , Voice Agents- 80 x = 30 & Asst. Managers- 80 x = 20} employees]s]
8 8 8
At the end of the year :
[Supervisor-(Opening- 30 + 60 Joining) = 90; Voice Agents- (Opening- 30 + 20 Joined – 20 Left) = 30]
(ii) No. of Employees Separated, Replaced and newly recruited during the year
Particulars Separations New Recruitment Replacement Total Joining
Payroll Processors 60 -- 20 20
Supervisors -- 60 -- 60
Voice Agents 20 -- 20 20
Assistant Managers 10 10 10 20
Sr. Voice Agents -- 8 -- 8
Sr. Data Processors -- 26 -- 26
Team Leaders 60 -- -- --
Total 210 1,124 110 1,234
(Since, Corrs Consultanc y Ltd. and its subsidiary are maintaining separate Personnel Department, so
transfer-in and transfer -out are treated as recruitment and separation respectively.)
(a) Calculation of Labour Turnover:
Replacement Method = No.of employeesreplacedduringthe year x 100
Average no.of employees onroll
110 100
 100 =  100 = 8.57%
(772 + 1,796) / 2 1,284
Separation Method = No.of employees separatedduringthe year x 100
210
= x 100 = 16.36%
1,284
(b) Labour Turnover under Flux Method
= No.of employees (Joined Separated) during the year x 10

= No.of employees (Re placed New recruited Separated) during the year x 100
1,234 + 210
x 10 = 112.46%
1,284
Labour Turnover calculated by the executive trainee of the Personnel department is incorrect as it has
not taken the No. of new recruitment while calculating the labour turnover under Flux method.
Q-17 Discuss the remedial steps to be taken to minimize the labour turnover.
Ans. The following steps are useful for minimizing labour turnover:
(a) Exit interview: An interview to be arranged with each outgoing employee to ascertain the reasons
of his leaving the organization.
(b) Job analysis and evaluation: to ascertain the requirement of each job.
(c) Organization should make use of a scientific system of recruitment, placement and promotion for
employees.
(d) Organization should create healthy atmosphere, providing education, medical and housing
facilities for workers.
(e) Committee for settling workers grievances.
Q-18 RST Company Ltd. has computed labour turnover rates for the quarter ended 31st March, 2017 as 20%,
10% and 5% under flux method, replacement method and separation method respectively. If the
number of workers replaced during that quarter is 50,
Calculate :
(i) Workers recruited and joined
(ii) Workers left and discharged and
(iii) Average number of workers on roll.
Ans.
No. of workers replaced
Labour Turnover Rate (Replacement method) = × 100
Average no. of workers
10 50
Or, =
100 Average no. of workers
Thus, Average No. of workers = 500
No. of workers replaced
Labour Turnover Rate (Separation method) = × 100
5 Number of workers separated

Or, =
100 50
Thus, No. of workers separated = 25
Labour Turnover Rate (Flux Method)
No. of Separations + No. of Accession  Joinings 

= × 100
20 25 + No. of accessions  Joinings 

Or, = =
100 500

Or, 100 (25 + No. of Accessions) = 10,000

Or, 25 + No. of Accessions =100
Thus, No. of Accessions = 100 - 25 =75
Accordingly,
(i) Workers recruited and Joined = 75
(ii) Workers left and discharged = 25
(iii) Average number of workers on roll = 500
Q-19 From the following information, Calculate Labour turnover rate and Labour flux rate:
No. of workers as on 01.01.20X8 = 7,600
No. of workers as on 31.12.20X8 = 8,400
During the year, 80 workers left while 320 workers were discharged and 1,200 workers were recruited
during the year; of these, 300 workers were recruited because of exits and the rest were recruited in
accordance with expansion plans.
Ans. Labour turnover rate:
It comprises of computation of labour turnover by using following methods:
(i) Separation Method:
No. of workers left + No. of workers discharged

= × 100
 80 320  × 100 =
400
× 100 = 5%
=
 7, 600 + 8, 400  ÷ 2 8, 000
(ii) Replacement Method:
No. of workers replaced 300

= × 100 = × 100 = 3.75%
Average number of workers 8,000
(iii) New Recruitment:
No. of workers newly recruited

= × 100
No. Recruitments - No. of Replacements

= × 100
1,200 - 300 900

= × 100 = × 100 = 11.25%
8,000 8, 000
Flux Method:
No. of separations + No. of accessions

= × 100
Average number of wor ker s

 400 + 1,200  × 100 = 1,600 × 100 = 20%

=
 7, 600 + 8, 400  ÷ 2 8, 000
Q-20 State various causes of and treatment of Overtime Premium in Cost Accounting.
Ans. Causes and Treatment of Overtime premium in cost accounting
Causes Treatment
(1) The customer may agree to bearthe (1) If overtime is resorted to at the desire ofthe
entire charge of overtimebecause customer, then overtime premium maybe
urgency of work. charged to the job directly.
(2) Overtime may be called for tomake (2) If overtime is required to cope with
up any shortfall inproduction due to generalproduction programmes or for
someunexpected development. meetingurgent orders, the overtime
premiumshould be treated as overhead cost of
the particular department or cost centre
which works overtime.
(3) Overtime work may be necessary to (3) If overtime is worked in a department dueto the
make up a shortfall inproduction due to fault of another department, the over time
some fault ofmanagement. premium should be charged tothe latter
department
(4) Overtime work may be resorted to,to (4) Overtime worked on account of abnormal
secure an out-turn in excess of the conditions such as flood, earthquake etc.,should
normal output to takeadvantage of an not be charged to cost, but toCosting Profit and
expanding marketor of rising demand Loss Account.
Q-21 In a factory, the basic wage rate is ` 300 per hour and overtime rates are as follows:
Before and after normal working hours 180% of basic wage rate
Sundays and holidays 230% of basic wage rate
During the previous year, the following hours were worked
- Normal time 1,00,000 hours
- Overtime before and after working hours 20,000 hours
Overtime on Sundays and holidays 5,000 hours
Total 1,25,000 hours
The following hours have been worked on job ‘A’
Normal 1,000 hours
Overtime before and after working hrs. 100 hours.
Sundays and holidays 25 hours.
Total 1,125 hours
You are required to CALCULATE the labour cost chargeable to job ‘A’ and overhead in each of the
following instances:
(i) Where overtime is worked regularly throughout the year as a policy due to the workers’ shortage.
(ii) Where overtime is worked irregularly to meet the requirements of production.
(iii) Where overtime is worked at the request of the customer to expedite the job.

Ans. Workings
Basic wage rate : ` 300 per hour
Overtime wage rate before and after working hours: ` 300 × 180% = ` 540 per hour
Overtime wage rate for Sundays and holidays : ` 300 × 230% = ` 690 per hour
Computation of average inflated wage rate (including overtime premium):
Annual wages for the previous year for normal time (1,00,000 hrs. × ` 300) 3,00,00,000
Wages for overtime before and after working hours (20,000 hrs. × ` 540) 1,08,00,000
Wages for overtime on Sundays and holidays (5,000 hrs. × ` 690) 34,50,000
Total wages for 1,25,000 hrs. 4,42,50,000
Rs.4, 42,50, 000

Average inflated wage rate = = ` 354
1,25, 000 hours
(i) Where overtime is worked regularly as a policy due to workers’ shortage:
The overtime premium is treated as a part of employee cost and job is charged at an inflated
wage rate. Hence, employee cost chargeable to job ‘A’
= Total hours × Inflated wage rate = 1,125 hrs. × ` 354 = ` 3,98,250
(ii) Where overtime is worked irregularly to meet the requirements of production:
Basic wage rate is charged to the job and overtime premium is charged to factory overheads as
under:
Employee cost chargeable to Job ‘A’: 1,125 hours @ `300 per hour = ` 3,37,500
Factory overhead: {100 hrs. × ` (540 – 300)} + {25 hrs. × ` (690 – 300)}
= { ` 24,000 + ` 9,750} = ` 33,750
(iii) Where overtime is worked at the request of the customer, overtime premium is also charged to
the job as under:
(`)
Job ‘A’ Employee cost 1,125 hrs. @ ` 300 = 3,37,500
Overtime premium 100 hrs. @ ` (540 – 300) = 24,000
25 hrs. @ ` (690 – 300) = 9,750
Total 3,71,250
Q-22 GZ Ld. pays the following to a skilled worker engaged in production works. The following are the
employee benefits paid to the employee:
(a) Basic salary per day ` 1,000
(b) Dearness allowance (DA) 20% of basic salary
(c) House rent allowance 16% of basic salary
(d) Transport allowance ` 50 per day of actual work
(e) Overtime Twice the hourly rate (considers basic and DA),
only if works more than 9 hours a day
otherwise no overtime allowance. If works for
more than 9 hours a day then overtime is
considered after 8th hours.

(f) Work of holiday and Sunday Double of per day basic rate provided works
atleast 4 hours. The holiday and Sunday basic is
eligible for all allowances and statutory
deductions.
(h) Earned leave & Casual leave These are paid leave.
(h) Employer’s contribution to 12% of basic and DA
Provident fund
(i) Employer’s contribution to 7% of basic and DA
Pension fund
The company normally works 8-hour a day and 26-day in a month. The company provides 30 minutes
lunch break in between.
During the month of August 2020, Mr.Z works for 23 days including 15th August and a Sunday and
applied for 3 days of casual leave. On 15th August and Sunday he worked for 5 and 6 hours respectively
without lunch break.
On 5th and 13th August he worked for 10 and 9 hours respectively.
During the month Mr. Z worked for 100 hours on Job no.HT200.
(i) Earnings per day
(ii) Effective wages rate per hour of Mr. Z.
(iii) Wages to be charged to Job no.HT200.
Ans. Workings:
1. Normal working hours in a month = (Daily working hours – lunch break) × no. of days
= (8 hours – 0.5 hours) × 26 days = 195 hours
2. Hours worked by Mr.Z = No. of normal days worked + Overtime + holiday/ Sunday worked
= (21 days × 7.5 hours) + (9.5 hours + 8.5 hours) + (5 hours + 6 hours)
= 157.5 hours + 18 hours + 11 hours = 186.50 hours.
(i) Calculation of earnings per day
Basic salary (`1,000 × 26 days) 26,000
31,200
Employer’s contribution to Provident fund (12% × ` 31,200) 3,744
Employer’s contribution to Pension fund (7% × ‘31,200) 2,184
41,288
No. of working days in a month (days) 26
Rate per day 1,588
Transport allowance per day 50
Earnings per day 1,638

(ii) Calculation of effective wage rate per hour of Mr. Z:

Basic salary (` 1,000 × 26 days) 26,000
Additional basic salary for Sunday & holiday (`1,000 × 2 days) 2,000
33,600
Transport allowance (` 50 × 23 days) 1,150
Overtime allowance (`160 × 2 × 2 hours)* 640
Employer’s contribution to Provident fund (12% × `33,600) 4,032
Employer’s contribution to Pension fund (7% × `33,600) 2,352
Total monthly wages 46,254
Hours worked by Mr. Z (hours) 186.5
Effective wage rate per hour 248
*(Daily Basic + DA) ÷ 7.5 hours
= (1,000+200) ÷ 7.5 = ` 160 per hour
(iii) Calculation of wages to be charged to Job no. HT200
= ` 248 × 100 hours = ` 24,800
Q-23 The following particulars have been compiled in respect of three workers:
M N O
Actual hours worked 380 100 540
Hourly rate of wages (in `) 90 100 110
Productions in units:
- Product A 210 - 600
- Product B 360 - 1350
- Product C 460 250 -
Standard time allowed per unit of each product is:
A B C
Minutes 15 20 30
For the purpose of piece rate, each minute is valued at ` 1.50.
You are required to CALCULATE the wages of each worker under:
(i) Guaranteed hourly rate basis.
(ii) Piece work earning basis but guaranteed at 75% of basic pay (Guaranteed hourly rate if his earnings
are less than 50% of basic pay.)
Ans.(i) Computation of wages of each worker under guaranteed hourly rate basis
Worker Actual hours worked Hourly wage rate (`) Wages (`)
(Hours)
M 380 90 34,200
N 100 100 10,000
O 540 110 59,400

(ii) Computation of Wages of each worker under piece work earning basis
Product Piece Worker-M Worker-N Worker-O
rate per
unit
(`) Units Wages (`) Units Wages (`) Units Wages (`)
A 22.50 210 4,725 - - 600 13,500
B 30.00 360 10,800 - - 1,350 40,500
C 45.00 460 20,700 250 11,250 - -
Total 36,225 11,250 54,000
Since each worker’s earnings are more than 50% of basic pay. Therefore, worker-M, N and O will be
paid the wages as computed i.e. ` 36,225, ` 11,250 and ` 54,000 respectively.
Working Notes:
1. Piece rate per unit
Product Standard time per Piece rate each Piece rate per unit
unit (in minutes) minute (`) (`)
A 15 1.5 22.50
B 20 1.5 30.00
C 30 1.5 45.00
Q-24 ABC Ltd. has its factory at two locations viz Noida and Patparganj. Rowan plan is used at Noida factory
and Halsey plan at Patparganj factory.
Standard time and basic rate of wages are same for a job which is similar and is carried out on similar
machinery. Normal working hours is 9 hours per day in a 5 day week.
Job at Noida factory is completed in 36 hours while at Patparganj factory it has taken 33 hours 45
minutes. Conversion costs at Noida and Patparganj are ` 6,084 and ` 5,569 respectively.
Overheads account for ` 25 per hour.
REQUIRED:
(i) To find out the normal wage; and
(ii) To compare the respective conversion costs.
Ans.
Particulars Noida Patparganj
Hours worked 36 hr. 33.75 hr.
Conversion Costs ` 6,084 ` 5,569
Less: Overheads ` 900 ` 844
( ` 25 x 36 hr.) ( ` 25 x 33.75 hr.)
Labour Cost ` 5,184 ` 4,725
(i) Finding of Normal wage rate:
Let Wage rate be ` R per hour, this is same for both the Noida and Patparganj factory.
Normal wage rate can be found out taking total cost of either factory.
Noida: Rowan Plan
Total Labour Cost = Wages for hours worked + Bonus as per Rowan plan
Navkar Digital Institute | Paper 3 : Compiler | Most Imp collection of Chapterwise Que. & Ans. -77---

 Time saved 
` 5,184 = Hours worked × Rate per hour +  ×Hours worked ×Rate per hour) 
 Time allowed 
 45- 36 
Or, ` 5,184 = 36 hr. × R +  × 36 ×R 
 45 
Or, ` 5,184 = 36R + 7.2R
R = ` 120
Normal wage = 36 hrs x ` 120 = ` 4,320
OR
Patparganj: Halsey Plan
Total Labour Cost = Wages for hours worked + Bonus as per Halsey plan
` 4,725 = Hours worked x Rate per hour + (50% x Hours saved x Rate per hour )
` 4,725 = 33.75 hr. x R + 50% x (45 hr. - 33.75 hr.) x R
` 4,725 = 39.375 R
R = ` 120
Normal Wage = 33.75 hrs x ` 120 = ` 4,050
(ii) Comparison of conversion costs:
Particulars Noida ( `) Patparganj ( `)
Normal Wages (36 x 120) 4,320
(33.75 x 120) 4,050
Bonus (7.2 x 120) 864
(5.625 x 120) 675
Overhead 900 844
6,084 5,569
Q-25 Following information is given of a newly setup organization for the year ended on 31st March, 2021.
Number of workers replaced during the period 50
Number of workers left and discharged during the period 25
Average number of workers on the roll during the period 500
(i) Compute the Employee Turnover Rates using Separation Method and Flux Method.
(ii) Equivalent Employee Turnover Rates for (i) above, given that the organization was setup on 31st
January, 2021.
Ans.(i) Employee Turnover rate
Using Separation method:
= Number of employees Separated during the period x 100
Average number of employees during the period on roll
50+25
= ×100 = 15%
500
78- Chapter-3 : Employee Cost

(ii) Equivalent Employee Turnover rate:

= Employee Turnover rate for the period x 365
Number of days in the period
5
Using Separation method × 365 = 30.42%
60
5
Or, × 360 = 30%
60
5
Or, × 12 = 30%
2
15
Using Flux method = x 365 = 91.25%
5%
60
15
Or, × 360 = 90%
60
15
Or, × 12 = 90%
2
Q-26 Z Ltd is working by employing 50 skilled workers. It is considering the introduction of an incentive
scheme - either Halsey Scheme (with 50% Bonus) or Rowan Scheme - of wage payment for increasing
the labour productivity to adjust with the increasing demand for its products by 40%. The company
feels that if the proposed incentive scheme could bring about an average 20% increase over the present
earnings of the workers, it could act as sufficient incentive for them to produce more and the company
has accordingly given assurance to the workers.
Because of this assurance, an increase in productivity has been observed as revealed by the figures for
the month of April, 2020:
Hourly rate of wages (guaranteed) ` 50
Average time for producing one unit by one worker at the previous 1.975 hours
performance (this may be taken as time allowed)
Number of working days in a month 24
Number of working hours per day of each worker 8
Actual production during the month 6,120 units
Required:
(i) Calculate the effective increase in earnings of workers in percentage terms under Halsey and
Rowan scheme.
(ii) Calculate the savings to Z Ltd in terms of direct labour cost per unit under both the schemes.
(iii) Advise Z Ltd about the selection of the scheme that would fulfil its assurance of incentivising
workers and also to adjust with the increase in demand.
Ans. Working Notes:
1. Total time wages of 50 workers per month:
= No. of working days in the month × No. of working hours per day of each worker
× Hourly rate of wages × No. of workers
= 24 days × 8 hrs. × ` 50 × 50 workers = ` 4,80,000

2. Time saved per month:

Time allowed per unit to a worker 1.975 hours
No. of units produced during the month by 50 workers 6,120 units
Total time allowed to produce 6,120 units (6,120 × 1.975 hrs) 12,087 hours
Actual time taken to produce 6,120 units (24 days × 8 hrs. × 50 workers) 9,600 hours
Time saved (12,087 hours – 9,600 hours) 2,487 hours
3. Bonus under Halsey scheme to be paid to 50 workers:
Bonus = (50% of time saved) × hourly rate of wages
= 50/100 × 2,487 hours × ` 50 = ` 62,175
Total wages to be paid to 50 workers are ( ` 4,80,000 + ` 62,175) ` 5,42,175, if ZLtd. considers the
introduction of Halsey Incentive Scheme to increase the worker productivity.
4. Bonus under Rowan Scheme to be paid to 50 workers:
Time taken
Bonus = × Time saved × hourly ratee
Time allowed
9,600 hours
= × 2,487 hours × ` 50 = ` 98,764
12,087 hours
Total wages to be paid to 50 workers are ( ` 4,80,000 + ` 98,764) ` 5,78,764, if Z Ltd. considers the
introduction of Rowan Incentive Scheme to increase the worker productivity.
(i) (a) Effective hourly rate of earnings under Halsey scheme:
(Refer to Working Notes 1, 2 and 3)
= = ` 56.48
Effective increase in earnings of worker (in %) = x 100 = 2.96%
(b) Effective hourly rate of earnings under Rowan scheme:

(Refer to Working Notes 1, 2 and 4)
Effective increase in earnings of worker (in %)= x 100 =20.58%

(ii) (a) Saving in terms of direct labour cost per unit under Halsey scheme:
(Refer to Working Note 3)
Labour cost per unit (under time wage scheme)
= 1.975 hours × ` 50 = ` 98.75
Labour cost per unit (under Halsey scheme)
Saving per unit = ` 98.75 – ` 88.60 = ` 10.15

(b) Saving in terms of direct worker cost per unit under Rowan Scheme:
(Refer to Working Note 4)
Labour cost per unit under Rowan scheme = ` 5,78,764/6,120 units= ` 94.57
Saving per unit = ` 98.75 – ` 94.57 = ` 4.18
(iii) Calculation of Productivity:
Normal Production Hours worked/Unit per Hour (9,600/1.975) 4,861
Actual Production Units 6,120
Increase in labour productivity 1,259
% Productivity i.e. increase in production/Normal production 25.9%
Advice: Rowan plan fulfils the company’s assurance of 20% increase over the present earnings of workers.
This would increase productivity by 25.9% only. It will not adjust with the increase in demand by 40%.
Q-27 Following are the particulars of two workers ‘R’ and ‘S’ for a month:
Particulars R S
(i) Basic Wages (`) 15,000 30,000
(ii) Dearness Allowance 50% 50%
(iii) Contribution to EPF (on basic wages) 7% 7.5%
(iv) Contribution to ESI (on basic wages) 2% 2%
(v) Overtime (hours) 20 -
The normal working hours for the month are 200 hrs. Overtime is paid at double the total of normal
wages and dearness allowance. Employer’s contribution to State Insurance and Provident Fund are at
equal rates with employees’ contributions.
Both workers were employed on jobs A, B and C in the following proportions :
Jobs A B C
R 75% 10% 15%
S 40% 20% 40%
Overtime was done on job ‘A’.
You are required to :
(i) Calculate ordinary wage rate per hour of ‘R’ and ‘S’.
(ii) Allocate the worker’s cost to each job ‘A’, ‘B’ and ‘C’.

Ans. (i) Calculation of Net Wages paid to Worker ‘R’ and ‘S’
Particulars R ( `) S ( `)
Basic Wages 15,000.00 30,000.00
Dearness Allowance (DA) (50% of Basic Wages) 7,500.00 15,000.00
Overtime Wages (Refer to Working Note 1) 4,500.00 ——
Gross Wages earned 27,000.00 45,000.00
Less: Provident Fund (7% × ` 15,000); (7.5% × ` 30,000) (1,050.00) (2,250.00)
Less: ESI (2% × ` 15,000); (2% × ` 30,000) (300.00) (600.00)
Net Wages paid 25,650.00 42,150.00
Calculation of ordinary wage rate per hour of Worker ‘R’ and ‘S’
R ( `) S ( `)
Gross Wages (Basic Wages + DA) 22,500.00 45,000.00
(excluding overtime)
Employer’s contribution to P.F. and E.S.I. 1,350.00 2,850.00
23,850.00 47,850.00
Ordinary wages Labour Rate per hour
( ` 23,850 ÷ 200 hours); ( ` 47,850 ÷ 200 hours) 119.25 239.25
(ii) Statement Showing Allocation of workers cost to each Job
Total Jobs
Wages A B C
Worker R
Ordinary Wages (15:2:3) 23,850.00 17,887.50 2,385.00 3577.50
Overtime 4500.00 4500.00 -
Worker S
Ordinary Wages (2:1:2) 47,850.00 19,140.00 9,570.00 19,140.00
76,200.00 41,527.50 11,955.00 22,717.50
Working Note:
Normal Wages are considered as basic wages.
2 x (Basic wage + D.A.) x 20 hours
Over time =
200 hours
`22,500
= 2x 20 hours
200
= ` 4,500
Q-28 Discuss any four objectives of ‘Time keeping’ in relation to attendance and payroll procedures.
Ans. The objectives of time-keeping in relation to attendance and payroll procedures are as follows:
(i) For the preparation of payrolls.
(ii) For calculating overtime.
(iii) For ascertaining and controlling employee cost.
(iv) For ascertaining idle time.
(v) For disciplinary purposes.
(vi) For overhead distribution

Q-29 Textile Ltd. pays following overtime premium for its labour beside normal wages of ` 100 per hour:
Before and after normal working hours 80% of basic wage rate
Sundays and holidays 150% of basic wage rate
During the previous year 2019-20, the following hours were worked:
Normal time 3,00,000 hours
Overtime before and after normal working hours 60,000 hours
Overtime on Sundays and holidays 15,000 hours
Total 3,75,000 hours
During the current year 2020-21, the following hours have been worked on job `Spinning’:
Normal 4,000 hours
Overtime before and after normal working hours 400 hours
Overtime on Sundays and holidays 100 hours
Total 4,500 hours
You are required to CALCULATE the labour cost chargeable to job `Spinning’ and overhead in each of the
following instances:
(a) Where overtime is worked regularly throughout the year as a policy due to the workers’ shortage.
(b) Where overtime is worked irregularly to meet the requirements of production.
(c) Where overtime is worked at the request of the customer to expedite the job.
Ans. Workings:
Basic wage rate = ` 100 per hour
Overtime wage rate before and after working hours = ` 100 + ( ` 100 × 80%)
= ` 180 per hour
Overtime wage rate for Sundays and holidays = ` 100 + ( ` 100 × 150%)
= ` 250 per hour
Computation of average inflated wage rate (including overtime premium):
Particulars Amount ( `)
Annual wages for the previous year for normal time 3,00,00,000
(3,00,000 hrs. × ` 100)
Wages for overtime before and after normal working hours 108,00,000
(60,000 hrs. × ` 180)
Wages for overtime on Sundays and holidays 37,50,000
(15,000 hrs. × ` 250)
Total wages for 3,75,000 hrs. 4,45,50,000
` 4,45,50,000
Average inflated wage rate = = ` 118.80
3,75,000 hours
(a) Where overtime is worked regularly as a policy due to workers’ shortage
The overtime premium is treated as a part of employee cost and job is charged at an inflated wage
rate. Hence, employee cost chargeable to job `Spinning’
= Total hours × Inflated wage rate = 4,500hrs. × ` 118.80 = ` 5,34,600
(b) Where overtime is worked irregularly to meet the requirements of production
Basic wage rate is charged to the job and overtime premium is charged to factory overheads as
under:

Employee cost chargeable to Job `Spinning’ = 4,500hours @ ` 100 per hour

= ` 4,50,000
Factory overhead = {400 hrs. × ( ` 100 × 80%)} + {100 hrs. × ( ` 100 × 150%)}
= { ` 32,000 + ` 15,000} = ` 47,000
(c) Where overtime is worked at the request of the customer, overtime premium is also charged to
the job as under:
( `)
Job `Spinning’ Employee cost: 4,500hrs. @ ` 100 = 4,50,000
Overtime premium: 400 hrs. @ ( ` 100 × 80%) = 32,000
100 hrs. @ ( ` 100 × 150%) = 15,000
Total 4,97,000
Q-30 JBL Sisters operates a boutique which works for various fashion houses and retail stores.
It has employed 26 workers and pays them on time rate basis. On an average an employee is allowed 8
hours for boutique work on a piece of garment. In the month of December 2020, two workers M and J
were given 15 pieces and 21 pieces of garments respectively for boutique work. The following are the
details of their work:
M J
Work assigned 15 pcs. 21 pcs.
Time taken 100 hours 140 hours
Workers are paid bonus as per Halsey System. The existing rate of wages is ` 60 per hour.
As per the new wages agreement the workers will be paid ` 72 per hour w.e.f. 1stJanuary 2021. At the
end of the month December 2020, the accountant of the company has wrongly calculated wages to
these two workers taking ` 72 per hour.
Required:
(i) CALCULATE the loss incurred due to incorrect rate selection.
(ii) CALCULATE the loss incurred due to incorrect rate selection, had Rowan scheme of bonus payment
followed.
(iii) CALCULATE the loss/ savings if Rowan scheme of bonus payment had followed.
(iv) DISCUSS the suitability of Rowan scheme of bonus payment for JBL Sisters?
Ans. Workings Notes:
Calculation of Total hours saved:
M J
No. of garments assigned (Pieces.) 15 21
Hour allowed per piece (Hours) 8 8
Total hours allowed (Hours) 120 168
Hours Taken (Hours) 100 140
Hours Saved (Hours) 20 28
(i) Calculation of loss incurred due to incorrect rate selection:
(While calculating loss only excess rate per hour has been taken)

M J Total
( `) ( `) ( `)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × `12) (140 Hrs. × ` 12)
Bonus (as per Halsey Scheme) 120 168
(50% of Time Saved × Excess (50% of 20 Hrs. × ` 12) (50% of 28 Hrs. × ` 12) 288
Rate)
Excess Wages Paid 1,320 1,848 3,168
(ii) Calculation of loss incurred due to incorrect rate selection had Rowan scheme of bonus payment
followed:
M J Total
( `) ( `) ( `)
Basic Wages 1,200 1,680 2,880
(100 Hrs. × ` 12) (140 Hrs. × ` 12)
Bonus (as per Rowan Scheme)
Excess Wages Paid 1,400 1,960 3,360

(iii) Calculation of amount that could have been saved if Rowan Scheme were followed
M J Total
(`) (`) (`)
Wages paid under Halsey Scheme 1,320 1,848 3,168
Wages paid under Rowan Scheme 1,400 1,960 3,360
Difference (loss) (80) (112) (192)
(iv) Rowan Scheme of incentive payment has the following benefits, which is suitable with the nature
of business in which JBL Sisters operates:
(a) Under Rowan Scheme of bonus payment, workers cannot increase their earnings or bonus
by merely increasing its work speed. Bonus under Rowan Scheme is maximum when the
time taken by a worker on a job is half of the time allowed. As this fact is known to the
workers, therefore, they work at such a speed which helps them to maintain the quality of
output too.
(b) If the rate setting department commits any mistake in setting standards for time to be taken
to complete the works, the loss incurred will be relatively low.
Q-31 Rowan Premium Bonus system does not motivate a highly efficient worker as a less efficient worker
and a highly efficient worker can obtain same bonus under this system. Discuss with an example.
Ans Rowan Premium Plan: According to this system a standard time allowance is fixed for the performance
of a job and bonus is paid if time is saved.
Under Rowan System, the bonus is that proportion of the time wages as time saved bears to the
standard time.

Time Saved
Bonus = × Time taken × Rate per hour
Time Allowed
Example explaining highly efficient worker and less efficient worker obtaining same bonus:
Time rate (per Hour) ` 60
Time allowed 8 hours.
Time taken by ‘X’ 6 hours.
Time taken by ‘Y’ 2 hours.
Bonus = Time Saved / Time Allowed × Time taken × Rate per hour
For ‘X’ = 2 hours / 8 hours × 6 hours × ` 60 = ` 90
For ‘Y’ = 6 hours8 hours × 2 hours × ` 60 = ` 90
From the above example, it can be concluded that a highly efficient worker may obtain same bonus as
less efficient worker under this system.
Q-32 A total of 108 labour hours have been put in a particular job card for repair work engaging a semi-skilled
and skilled labour (Mr. Deep and Mr. Sam respectively).
The hours devoted by both the workers individually on daily basis for this particular job are given
below:
Monday Tuesday Wednesday Thursday Friday
10.5 8.0 10.5 9.5 10.5
The skilled labour also worked on Saturday for 10 hours.
Sunday is a weekly holiday and each worker has to work for 8 hours on all week days and 5 hours on
Saturdays; the workers are however paid full wages for Saturday (8 hours for 5 hours worked).
Semi-skilled and skilled worker is paid ordinary wage @ ‘ 400 and ‘ 600 respectively per day of 8 hours
labour. Further, the workers are also paid dearness allowance @ 20%.
Extra hours worked over and above 8 hours are also paid at ordinary wage rate however, overtime
premium of 100% of ordinary wage rate is paid if a worker works for more than 9 hours in a day AND 48
hours in a week.
You are required to COMPUTE the wages payable to Mr. Deep (Semi-skilled) and Mr. Sam (Skilled).
Ans. Calculation of total normal hours to be paid for Mr. Deep (Semi-skilled):
Day Normal Extra Overtime Equivalent Total normal
hours hours hours normal hours for hours
overtime worked
A B C D = C×2 E = A+B+D
Monday 8 1 1½ 3 12
Tuesday 8 — — — 8
Wednesday 8 1 1½ 3 12
Thursday 8 1 ½ 1 10
Friday 8 1 1½ 3 12
Saturday — — — — —
Total 40 4 5 10 54
Calculation of total normal hours to be paid for Mr. Sam (Skilled):

Day Normal Extra Overtime Equivalent Total normal

hours hours hours normal hours for hours
overtime worked
A B C D = C×2 E = A+B+D
Monday 8 1 1½ 3 12
Tuesday 8 — — — 8
Wednesday 8 1 1½ 3 12
Thursday 8 1 ½ 1 10
Friday 8 1 1½ 3 12
Saturday 5 3* + 1 1** 2 11
Total 45 8 6 12 65
*Mr. Sam will be paid for equivalent 8 normal working hours at ordinary wage rate, though 5 hours of
working is required on Saturday. Further, extra 9th hour worked will also be paid at ordinary wage rate.
** Overtime of 1 hour worked over and above 9 hours will be paid at overtime rate.
Wages payable:
Mr. Deep Mr. Sam
Basic Wages per hour (‘ 400/8, ‘ 600/8) (‘) 50 75
Dearness allowance per hour (@ 20%) (‘) 10 15
Hourly rate (‘) 60 90
Total equivalent normal hours 54 65
Total Wages payable (‘) 3,240 5,850
Q-33 A skilled worker is paid a guaranteed wage rate of ` 150 per hour. The standard time allowed for a job
is 10 hours. He took 8 hours to complete the job. He has been paid the wages under Rowan Incentive
Plan.
(i) Calculate an effective hourly rate of earnings under Rowan Incentive Plan.
(ii) Calculate the time in which he should complete the job, if the worker is placed under Halsey
Incentive Scheme (50%) and he wants to maintain the same effective hourly rate of earnings.
Ans.
(i) Calculation of Effective hourly rate of earnings under Rowan Incentive Plan:
Standard time allowed = 10 hours
Time taken = 8 hours; Time saved = 2 hours
A Basic guaranteed wages (`150×8 hours) 1,200
B Add: Bonus for time saved ( 2/10 × 8 × ` 150) 240
C Total earnings (A+B) 1,440
D Hours worked 8 hours
E Effective hourly rate (C÷D) 180
(ii) Let the time taken to complete the job is “T” and the time saved is 10-T
Effective hourly rate under the Halsey Incentive scheme
= (Rate × Hours Worked) + (Rate × 50% of Time Saved) = ` 180
Hours Worked

= ` 180
150T + 750 -75T = 180T

180T-75T = 750
750
T= = 7.14 hours
105
Q-34 R Ltd. is facing increasing employee turnover in the factory and before analyzing the causes and taking
remedial steps; the management wants to have an idea of the profit foregone as a result of employee
turnover in the last year.
Last year sales amounted to ` 99,63,960 and P/V ratio was 20%.
The total number of actual hours worked by the direct employee force was 5.34 lakhs. The actual direct
employee hours included 36,000 hours attributable to training new recruits, out of which half of the
hours were unproductive. As a result of the delays by the Personnel Department in filling vacancies
due to employee turnover, 1,20,000 potentially productive hours (excluding unproductive training
hours) were lost.
The costs incurred consequent on employee turnover revealed, on analysis, the following:
Settlement cost due to leaving ` 52,584
Recruitment costs ` 32,088
Selection costs ` 15,300
Training costs ` 36,588
Assuming that the potential production lost as a consequence of employee turnover could have been
sold at prevailing prices, FIND the profit foregone last year on account of employee turnover.
Ans. Workings:
(i) Computation of productive hours
Actual hours worked 5,34,000
Less: Unproductive training hours 18,000
Actual productive hours 5,16,000
(ii) Productive hours lost:
Loss of potential productive hours + Unproductive training hours
= 1,20,000 + 18,000 = 1,38,000 hours
(iii) Loss of contribution due to unproductive hours:

Contribution lost for 1,38,000 hours =
Computation of profit forgone on account of employee turnover

(`)
Contribution foregone (as calculated above) 5,32,956
Settlement cost due to leaving 52,584
Recruitment cost 32,088
Selection cost 15,300
Training costs 36,588
Profit foregone 6,69,516
Q-35 The standard time allowed for a certain piece of work is 240 hours. Normal wage rate is ` 75 per hour.
The bonus system applicable to the work is as follows:
Percentage of time saved to time allowed (slab rate) Bonus
(i) Up to the first 20% of time allowed 25% of the corresponding saving in time.
(ii) For and within the next 30% of time allowed 40% of the corresponding saving in time.
(iii) For and within the next 30% of time allowed 30% of the corresponding saving in time.
(iv) For and within the next 20% of time allowed 10% of the corresponding saving in time.
CALCULATE the total earnings of a worker over the piece of work and his earnings per hour when he
takes- 2
(a) 256 hours,
(b) 120 hours, and
(c) 24 hours respectively.
Ans. Calculation of total earnings and earnings per hour:
Particulars (a) Time taken (b) Time taken (c) Time taken
is 256 hours is 120 hours is 24 hours
A. Time Allowed 240 hours 240 hours 240 hours
B. Time taken 256 hours 120 hours 24 hours
C. Time Saved (A-B) Nil 120 hours 216 hours
D. Bonus hours (Refer workings) Nil 40.80 hours 64.80 hours
E. Hours to be paid (B+D) 256 hours 160.80 hours 88.80 hours
F. Wages rate per hour ` 75 ` 75 ` 75
G. Total earnings (E×F) ` 19,200 ` 12,060 ` 6,660
H. Earnings per hour (G÷B) ` 75 ` 100.50 ` 277.50

Working Notes:
Calculation of bonus hours:
Time saved 120 hours Time saved 216 hours
For first 20% of time allowed i.e. 48 hours 12 12
(25% of 48 hours) (25% of 48 hours)
For next 30% of time allowed i..e. 72 hours 28.80 28.80
(40% of 72 hours) (40% of 72 hours)
For next 30% of time allowed i..e. 72 hours - 21.60
(30% of 72 hours)
For next 20% of time allowed i..e. 48 hours - 2.40
(10% of 24 hours)
Bonus hours 40.80 64.80
   

CHAPTER- 4
OVERHEADS-ABSORPTION COSTING METHOD
Q-1 PLR Ltd. manufacturers a single product and recovers the overheads by adopting a single blanket rate
based on machine hours. The budgeted production overheads of the factory for the FY 2019-20 are
`50,40,000 and budgeted machine hours are 6,000.
For a period of first six months of the financial year 2019?20, following information were extracted
from the books:
Actual production overheads `34,08,000
Amount included in the production overheads:
Paid as per court’s order `4,50,000
Expenses of previous year booked in current year `1,00,000
Paid to workers for strike period under an award `4,20,000
Obsolete stores written off `36,000
Production and sales data of the concern for the first six months are as under:
Production:
Finished goods 1,10,000 units
Works-in-progress
(50% complete in every respect) 80,000 units
Sale:
Finished goods 90,000 units
The actual machine hours worked during the period were 3,000 hours. It is revealed from
the analysis of information that 40% of the over/under-absorption was due to defective
production policies and the balance was attributable to increase in costs.
You are required:
(i) to determine the amount of over/ under absorption of production overheads for theperiod,
(ii) to show the accounting treatment of over/ under-absorption of production overheads,and
(iii) to apportion the over/ under-absorbed overheads over the items.
Ans. (i) Amount of over/ under absorption of production overheads during the period of firstsix months
of the year 2019-20:
Amount(`) Amount(`)
Total production overheads actually incurred during theperiod 34,08,000
Less: Amount paid to worker as per court order 4,50,000
Expenses of previous year booked in the currentyear 1,00,000
Wages paid for the strike period under an award 4,20,000
Obsolete stores written off 36,000 10,06,000
24,02,000

Less: Production overheads absorbed as per machinehour rate

(3,000 hours × `840*) 25,20,000
Amount of over absorbed production overheads 1,18,000
` 50,40,000
*Budgeted Machine hour rate (Blanket rate) = = ` 840 per hour
6,000 hours
(ii) Accounting treatment of over absorbed production overheads: As, 40% of the over absorbed overheads
were due to defective production policies, this being abnormal, hence should be credited to Costing
Profit and Loss Account.
Amount to be credited to Costing Profit and Loss Account = `1,18,000× 40% = `47,200.
Balance of over absorbed production overheads should be distributed over Works in progress, Finished
goods and Cost of sales by applying supplementary rate*. Amount to be distributed = `1,18,000× 60% =
`70,800
` 70,800
Supplementary rate = = ` 0.472 per unit
1,50,000 units
(iii) Apportionment of over absorbed production overheads over WIP, Finished goods and Cost of sales:
Equivalent Amount
completed units (`)
Work-in-Progress (80,000 units × 50% ×0.472) 40,000 18,880
Finished goods (20,000 units × 0.472) 20,000 9,440
Cost of sales (90,000 units × 0.472) 90,000 42,480
Total 1,50,000 70,800
Q-2 The Union Ltd. has the following account balances and distribution of direct charges on 31st March,
2019.
Total Production Depts. Service Depts.
Machine Shop Packing General Stores
Plant
Allocated Overheads: (`) (`) (`) (`) (`)
Indirect labour 29,000 8,000 6,000 4,000 11,000
Maintenance Material 9,900 3,400 1,600 2,100 2,800
Misc. supplies 5,900 1,500 2,900 900 600
Supervisor’s salary 16,000 — — 16,000 —
Cost & payroll salary 80,000 — — 80,000 —
Overheads to be apportioned:
Power 78,000
Rent 72,000
Fuel and Heat 60,000
Insurance 12,000
Taxes 8,400
Depreciation 1,20,000
The following data were compiled by means of the factory survey made in the previous year:
-92- Chapter-4 : Overheads-Absorption Costing Method

Floor Space Radiator Section No. of employees Investment H.P. hours

Machine Shop 2,000 Sq. ft. 45 20 8,00,000 3,500
Packing 800 Sq. ft. 90 12 2,40,000 500
General Plant 400 Sq. ft. 30 4 80,000 -
Stores & maintenance 1,600 Sq. ft. 60 8 1,60,000 1,000
Expenses charged to the stores departments are to be distributed to the other departments by the
following percentages:
Machine shop 50%; Packing 20%; General Plant 30%;
General Plant overheads is distributed on the basis of number of employees.
(a) PREPARE an overhead distribution statement with supporting schedules to show computations
and basis of distribution.
(b) DETERMINE the service department distribution by simultaneous equation method.
Ans. (a) Overhead Distribution Statement
Production Service Departments
Departments
Machine Packing General Stores
Shops Plant
Allocated Overheads: (`) (`) (`) (`)

Indirect labour 8,000 6,000 4,000 11,000
Maintenance Material 3,400 1,600 2,100 2,800
Misc. supplies 1,500 2,900 900 600
Supervisor’s salary — — 16,000 —
Cost & payroll salary — — 80,000 —
Total allocated overheads 12,900 10,500 1,03,000 14,400
Add: Apportioned Overheads
(As per Schedule below) 1,84,350 70,125 22,775 73,150
1,97,250 80,625 1,25,775 87,550
Schedule of Apportionment of Overheads
Item of Cost Basis Production Service Departments
Departments
Machine Packing General Stores
Shops (`) (`) Plant (`) (`)
Power HP hours 54,600 7,800 — 15,600
(7 : 1 : - : 2)
Rent Floor space 30,000 12,000 6,000 24,000
(5 : 2 : 1 : 4)
Fuel & Heat Radiator sec. 12,000 24,000 8,000 16,000
(3 : 6 : 2 : 4)
Insurance Investment 7,500 2,250 750 1,500
(10 : 3 : 1 : 2)
Taxes Investment 5,250 1,575 525 1,050
(10 : 3 : 1 : 2)
Depreciation Investment 75,000 22,500 7,500 15,000
(10 : 3 : 1 : 2) 1,84,350 70,125 22,775 73,150

(b) Re-distribution of Overheads of Service Departments to Production Departments:

Let, the total overheads of General Plant = ‘a’ and the total overheads of Stores = ‘b’
a = 1,25,775 + 0.3b ..........................................(i)
b = 87,550 + 0.2a ..........................................(ii)
Putting the value of ‘b’ in equation no. (i)
a = 1,25,775 + 0.3 (87,550 + 0.2a)
Or a = 1,25,775 + 26,265 + 0.06a
Or 0.94a = 1,52,040 Or a = 1,61,745 (appx.)
Putting the value of a = 1,61,745 in equation no. (ii) to get the value of ‘b’
b = 87,550 + 0.2 × 1,61,745 = 1,19,899
Secondary Distribution Summary
Particulars Total (`) Machine Shops (`) Packing (`)
Allocated and Apportioned 2,77,875 1,97,250.00 80,625.00
overheads as per Primary
distribution
- General Plant 1,61,745 80,872.50 48,523.50
5 3
(1,61,745 × ) (1,61,745 × )
10 10
- Stores 1,19,899 59,949.50 23,979.80
(1,19,899 × 50%) (1,19,899 × 20%)
3,38,072.00 1,53,128.30
Q-3 MST Limited has collected the following data for its two activities. It calculates activity cost rates based
on cost driver capacity.
Activity Cost Driver Capacity Cost (`)
Power Kilowatt hours 50,000 kilowatt hours 40,00,000
Quality Inspections Number of Inspections 10,000 Inspections 60,00,000
The company makes three products M, S and T. For the year ended March 31, 20X9, the following
consumption of cost drivers was reported:
Product Kilowatt hours Quality Inspections
M 10,000 3,500
S 20,000 2,500
T 15,000 3,000
Required:
(i) PREPARE a statement showing cost allocation to each product from each activity.
(ii) CALCULATE the cost of unused capacity for each activity.
(iii) STATE the factors the management considers in choosing a capacity level to compute the budgeted
fixed overhead cost rate.
Ans. (i) Statement of cost allocation to each product from each activity
Product
M (`) S (`) T (`) Total (`)
Power(Refer to working note) 8,00,000 16,00,000 12,00,000 36,00,000
(10,000 kWh × `80) (20,000 kWh × `80) (15,000 kWh × `80)
Quality Inspections (Refer to 21,00,000 15,00,000 18,00,000 54,00,000
working note) (3,500 inspections × (2,500 inspections × (3,000
`600) `600) inspections ×
`600)

Working Note:
Rate per unit of cost driver:
Power : (`40,00,000 ÷ 50,000 kWh) = `80/kWh
Quality Inspection : (`60,00,000 ÷ 10,000 inspections) = `600 per inspection
(ii) Calculation of cost of unused capacity for each activity:
(`)
Power 4,00,000
(`40,00,000 – `36,00,000)
Quality Inspections
(`60,00,000 – `54,00,000) 6,00,000
Total cost of unused capacity 10,00,000
(iii) Factors management consider in choosing a capacity level to compute the budgeted fixed overhead
cost rate:
- Effect on product costing & capacity management
- Effect on pricing decisions.
- Effect on performance evaluation
- Effect on financial statements
- Regulatory requirements.
- Difficulties in forecasting for any capacity level.
Q-4 Sree Ajeet Ltd. having fifteen different types of automatic machines furnishes information as under
for 20X8-20X9
(i) Overhead expenses: Factory rent ` 1,80,000 (Floor area 1,00,000 sq. ft.), Heat and gas ` 60,000 and
supervision ` 1,50,000.
(ii) Wages of the operator are ` 200 per day of 8 hours. Operator attends to one machine when it is
under set up and two machines while they are under operation.
In respect of machine B (one of the above machines) the following particulars are furnished:
(i) Cost of machine `1,80,000, Life of machine- 10 years and scrap value at the end of its life ` 10,000
(ii) Annual expenses on special equipment attached to the machine are estimated as ` 12,000
(iii) Estimated operation time of the machine is 3,600 hours while set up time is 400 hours per annum
(iv) The machine occupies 5,000 sq. ft. of floor area.
(v) Power costs ` 5 per hour while machine is in operation.
ESTIMATE the comprehensive machine hour rate of machine B. Also find out machine costs to be
absorbed in respect of use of machine B on the following two work orders
Work order- 1 Work order-2
Machine set up time (Hours) 15 30
Machine operation time (Hours) 100 190

Ans. Sree Ajeet Ltd.

Statement showing comprehensive machine hour rate of Machine B
(` )
Standing Charges:
Factory rent {(` 1,80,000/1,00,000 sq. ft.) × 5,000 Sq. ft.} 9,000
Heat and Gas (` 60,000/15 machines) 4,000
Supervision (` 1,50,000/ 15 machines) 10,000
Depreciation [(` 1,80,000 – ` 10,000)/ 10 years] 17,000
Annual expenses on special equipment 12,000
52,000
Fixed cost per hour (` 52,000/ 4,000 hrs.) 13/-
Set up rate Operational rate
Per hour (`) Per hour (`)
Fixed cost 13.00 13.00
Power — 5.00
Wages 25.00 12.50
Comprehensive machine hour rate per hr. 38.00 30.50
Statement of ‘B’ machine costs
to be absorbed on the two work orders
Work order-1 Work order-2
Hours Rate Amount Hours Rate Amount
` ` ` ` `
Set up time cost 15 38 570 30 38 1,140
Operation time cost 100 30.5 3,050 190 30.5 5,795
Total cost 3,620 6,935
Q-5 PQR manufacturers – a small scale enterprise, produces a single product and has adopted a policy to
recover the production overheads of the factory by adopting a single blanket rate based on machine
hours. The annual budgeted production overheads for the year 2017-18 are ` 44,00,000 and budgeted
annual machine hours are 2,20,000.
For a period of first six months of the financial year 2017-18, following information were extracted
from the books:
Actual production overheads ` 24,88,200
Amount included in the production overheads:
Paid as per court’s order ` 1,28,000
Expenses of previous year booked in current year ` 1,200
Paid to workers for strike period under an award ` 44,000
Obsolete stores written off ` 6,700
Production and sales data of the concern for the first six months are as under:
Production:


Works-in-progress
(50% complete in every respect) 18,000 units
Sale:
The actual machine hours worked during the period were 1,16,000 hours. It is revealed from the analysis
of information that ¼ of the under/ over absorption was due to defective production policies and the
balance was attributable to increase/decrease in costs.
Required :
(i) DETERMINE the amount of under/over absorption of production overheads for the six-month period
of 2017-18.
(ii) EXAMINE the accounting treatment of under/ over absorption of production overheads, and
(iii) CALCULATE the apportionment of the under/ over absorbed overheads over the items.
Ans.
(i) Amount of under/ over absorption of production overheads during the period of first six months of the
year 2017-2018:
Amount Amount
(` ) (` )
Total production overheads actually incurred 24,88,200
during the period
Less: Amount paid to worker as per court order 1,28,000
Expenses of previous year booked in the
current year 1,200
Wages paid for the strike period under an award 44,000
Obsolete stores written off 6,700 (1,79,900)
23,08,300
Less: Production overheads absorbed as per
machine hour rate (1,16,000 hours × `20*) 23,20,000
Amount of over absorbed production overheads 11,700
` 44,00,000
*Budgeted Machine hour rate (Blanket rate) = = ` 20 per hour
2,20,000 hours
(ii) Accounting treatment of over absorbed production overheads: As, one fourth of the over absorbed
overheads were due to defective production policies, this being abnormal, hence should be transferred
to Costing Profit and Loss Account.
Amount to be transferred to Costing Profit and Loss Account = (11,700 × ¼) = ` 2,925
Balance of over absorbed production overheads should be distributed over Works in progress, finished
goods and Cost of sales by applying supplementary rate*.
Amount to be distributed = (11,700 × ¾) =` 8,775
` 8,775
Supplementary rate = = 0.2659 per unit
33,000 units
(iii) Apportionment of under absorbed production overheads over WIP, Finished goods and Cost of sales:

Equivalent completed units Amount (`)

Work-in-Progress (18,000 units × 50% × ` 0.2659) 9,000 2,393
Finished goods (2,400 units × ` 0.2659) 2,400 638
Cost of sales (21,600 units × ` 0.2659) 21,600 5,744
Total 33,000 8,775
Q-6 ABS Enterprises produces a product and adopts the policy to recover factory overheads applying
blanket rate based on machine hours. The cost records of the concern reveal following information
Budgeted production overheads ` 10,35,000
Budgeted machine hours 90,000
Actual machine hours worked 45,000
Actual production overheads ` 8,80,000
Production overheads (actual) include -Paid to worker as per court’s award ` 50,000
Wages paid for strike period ` 38,000
Stores written off ` 22,000
Expenses of previous year booked in current year ` 18,500
Production -
Finished goods 30000 units
Sale of finished goods 27000 units
The analysis of cost information reveals that 1/3 of the under absorption of overheads was due to
defective production planning and the balance was attributable to increase in costs.
You are required:
(i) To find out the amount of under absorbed production overheads.
(ii) To give the ways of treating it in Cost Accounts.
(iii) To apportion the under absorbed overheads over the items.
Ans. (i) Amount of under absorption of production overheads:
Particular Amoun t (`) Amount (`)
Total production overheads actually incurred 8,80,000
Less: Amount paid to worker as per court order 50,000
Wages paid for the strike period under an award 38,000
Stores written off 22,000
Expenses of previous year booked in the current year 18,500 1,28,500
7,51,500
Less: Production overheads absorbed as per machine hour rate ]
(45,000 hours × `11.50*) 5,17,500
Amount of under- absorbed production overheads 2,34,000
` 10,35,000
*Budgeted Machine hour rate (Blanket rate) =  ` 11.50 per hour
90,000
(ii) Accounting treatment of under absorbed production overheads:
(a) As 1/3rd of the under absorbed overheads were due to defective production planning, this being
abnormal, hence should be debited to Costing Profit and Loss Account.
Amount to be debited to Costing Profit and Loss Account
= ` 2,34,000 × 1/3 = ` 78,000.

(b) Balance of under absorbed production overheads should be distributed over Finished goods and
Cost of sales by applying supplementary rate*.
Amount to be distributed = ` 2,34,000 × 2/3 =` 1,56,000
` 1,56,000
*Supplementary rate =  ` 5.20 per hour
30,000 units
(iii) Apportionment of under absorbed production overheads over Finished goods and Cost of sales:
Particular Units Amount (`)
Finished goods (3,000 units × `5.20) 3,000 15,600
Cost of sales (27,000 units × ` 5.20) 27,000 1,40,400
Total 30,000 1,56,000
Q-7 M/s Zaina Private Limited has purchased a machine costing ` 29,14,800 and it is expected to have a
salvage value of ` 1,50,000 at the end of its effective life of 15 years.
Ordinarily the machine is expected to run for 4,500 hours per annum but it is estimated that 300 hours
per annum will be lost for normal repair & maintenance. The other details in respect of the machine
are as follows :
(i) Repair & Maintenance during the whole life of the machine are expected to be ` 5,40,000.
(ii) Insurance premium (per annum) 2% of the cost of the machine.
(iii) Oil and Lubricants required for operating the machine (per annum) ` 87,384.
(iv) Power consumptions: 10 units per hour @ ` 7 per unit. No power consumption during repair and
maintenance. ·
(v) Salary to operator per month ` 24,000. The operator devotes one third of his time to the machine.
You are required to calculate comprehensive machine hour rate.
Ans. Effective machine hour = 4,500 – 300 = 4,200 hours
Calculation of Comprehensive machine hour rate
Elements of Cost and Revenue Amount (`) Per
Annum
Repair and Maintenance(`5,40,000 ÷15 years) 36,000
Power (4,200 hours × 10 units × `7) 2,94,000
 ` 29,14,800 - ` 1,50,000 
Depreciation   1,84,320
 15 years 
Insurance (` 29,14,800 × 2%) 58,296
Oil and Lubricant 87,384
Salary to Operator {(`24,000×12)/3} 96,000
Total Cost 7,56,000

Effective machine hour 4,200
Total Machine Rate Per Hour 180
Q-8 M/s. NOP Limited has its own power plant and generates its own power. Information regarding power
requirements and power used are as follows:

Production Dept. Service Dept.

A B X Y
(Horse power hours)
Needed capacity production 20,000 25,000 15,000 10,000
Used during the quarter ended
September 2018 16,000 20,000 12,000 8,000
During the quarter ended September 2018, costs for generating power amounted to ` 12.60 lakhs out
of which ` 4.20 lakhs was considered as fixed cost.
Service department X renders services to departments A, B, and Y in the ratio of 6:4:2 whereas department
Y renders services to department A and B in the ratio of 4: 1.
The direct labour hours of department A and B are 67500 hours and 48750 hours respectively.
Required:
1 Prepare overheads distribution sheet.
2 Calculate factory overhead per labour hour for the dept. A and dept. B.
Ans.
(1) Overheads distribution Sheet
Item Basis Total Production Service Departments
Amount (`) Departments
A (`) B (`) X (`) Y (`)
Variable overheads Horse Power 8,40,000 2,40,000 3,00,000 1,80,000 1,20,000
(` 12.60 lakhs- hours used
` 4.20 lakhs)
Fixed Overheads Horse power 4,20,000 1,20,000 1,50,000 90,000 60,000
for Capacity
production
Total Overheads 12,60,000 3,60,000 4,50,000 2,70,000 1,80,000
Service dept X As per the (2,70,000) 1,35,000 90,000 45,000
allocated to A, B & Y ratio given 6:4:2
Service dept Y As per the (1,80,000+4 1,80,000 45,000
allocated to A & B ratio of 4:1 5000=
2,25,000)
Total Overheads of 6,75,000 5,85,000
Production departments
(2) Calculation of Factory overhead per labour hour
Item Production Departments
A (`) B (`)
Total overheads 6,75,000 5, 85,000
Direct labour hours 67,500 48,750
Factory overheads per hour 10 12
Q-9 State the bases of apportionment of following overhead costs:
(i) Air-conditioning
(ii) Time keeping
(iii) Depreciation of plant and machinery
(iv) Power/steam consumption
(v) Electric power (Machine operation)

Ans. Overhead Cost Bases of Apportionment

(i) Air- conditioning Floor area, or volume of department
(ii) Time keeping Number of workers
(iii) Depreciation of plant and Capital values
machinery
(iv) Power/steam consumption Technical estimates
(v) Electric power (machine Horse power of machines, or Number of machine
operation) hour, or value of machines or units consumed.
Kilo-watt hours.
Q-10 From the details furnished below you are required to COMPUT E a comprehensive machine -hour rate:
Original purchase price of the machine (subject to
depreciation at 10% per annum on original cost) Rs. 6,48,000
Normal working hours for the month 200 hours
(T he machine works for only 75% of normal capacity)
Wages to Machine-man Rs. 400 per day (of 8 hours)
Wages to Helper (machine attendant) Rs. 275 per day (of 8 hours)
Power cost for the month for the time worked Rs. 65,000
Supervision charges apportioned for the machine centre for the month Rs. 18,000
Electricity & Lighting for the month Rs. 9,500
Repairs & maintenance (machine) including Consumable stores per month Rs. 17,500
Insurance of Plant & Building (apportioned) for the year Rs. 18,250
Other general expense per annum Rs. 17,500
T he workers are paid a fixed Dearness allowance of Rs. 4,575 per month. Production bonus payable to
workers in terms of an award is equal to 33.33% of basic wages and dearness allowance. Add 10% of the
basic wage and dearness allowance against leave wages and holidays with pay to arrive at a
comprehensive labo ur-wage for debit to production .
Ans. Effective machine hours = 200 hours × 75% = 150 hours
Computation of Comprehensive Machine Hour Rate
Per month Per hour
( Rs.) ( Rs.)
Fixed cost
Supervision c harges 18,000.00
Electricity and lighting 9,500.00
Insurance of Plant and building ( Rs.18,250 ÷12) 1,520. 83
Other General Expenses (Rs.17,500÷12) 1,458.33
Depreciation (Rs.64,800÷12) 5,400.00
35,879.16 239.19
Direct Cost
Repairs and maintenance 17,500.00 116.67
Power 65,000.00 433.33
Wages of machine man 139.27
Wages of Helper 109.41
Machine Hour rate (Comprehensive) 1,037.87

Wages per machine hour

Machine man Helper
Wages for 200 hours
Machine-man ( Rs.400 × 25) Rs.10,000.00 ---
Helper ( Rs.275 × 25) --- Rs.6,875.00
Dearness A llowance (DA) Rs.4,575.00 Rs.4,575.00
Rs.14,575.00 Rs.11,450.00
Production bonus (1/3 of Basic and DA) 4,858.33 3,816.67
Leave wages (10% of Basic and DA) 1,457.50 1,145.00
20,890.83 16,411.67
Effective wage rate per machine hour Rs.139.27 Rs.109.41
Q-11 Madhu Ltd. has calculated a predetermined overhead rate of Rs.22 per machine hour for its Quality
Check (QC) department. T his rate has been calculated for the budgeted level of activity and is considered
as appropriate for absorbing overheads. The following overhead expenditures at various activity levels
had been estimated.
Total overheads Number of machine hours
Rs.3,38,875 14,500
Rs.3,47,625 15,500
Rs.3,56,375 16,500
(i) Calculate the variable overhead absorption rate per machine hour.
(ii) Calculate the estimated total fixed overheads.
(iii) CALCULATE the budgeted level of activity in machine hours.
(iv) CALCULATE the amount of under/over absorption of overheads if the actual machine hours were
14,970 and actual overheads were Rs.3,22,0 00.
(v) ANALYSE the arguments for and against using departmental absorption rates as opposed to a
single or blanket factory wide rate.
Ans.
(i) Variable overhead absorption rat = Difference in Total Overheads
Difference in levels in terms of machine hours
Rs.3, 47,625 - Rs.3,38,875

= Rs.8.75 per machine hour..
15,500 hours - 14,500 hours
(ii) Calculation of Total fixed overheads:
(Rs.)
Total overheads at 14,500 hours 3,38,875
Less: Variable overheads (Rs. 8.75 × 14,500) (1,26,875)
Total fixed overheads 2,12,000
(iii) Calculation of Budgeted level of activity in machine hours:
Let budgeted level of activity = X
(Rs. 8.75 X + Rs. 2,12, 000)
Then, = Rs. 22
X

8.7 5X + Rs.2,12 ,000 = 2 2 X

13 .25X = 2,12,00 0
X =16,000
Thus, budgeted level of activity = 16,000 machine hours.
(iv) Calculation of Under / Over absorption of overheads:
(Rs.)
Actual overheads 3,22,000
Absorbed overheads (14,970 hours × Rs. 22 per hour) 3,29,340
Over-absorption (3,29,340 – 3,22,000) 7,340
(v) Departmental absorption rates provide costs which are more precise than those provided by the use of
blanket absorption rates. Departmental absor ption rates facilitate variance analysis and cost control.
T he application of these rates make the task of stock and work -in-process (WIP) valuation easier and
more precise. However, the setting up and monitoring of these rates can be time consuming and
expensive.
Q-12 A machine shop cost centre contains three machines of equal capacities.
To operate these three machines nine operators are required i.e. three operators on each machine.
Operators are paid ` 20 per hour. The factory works for fourty eight hours in a week which includes 4
hours set up time. The work is jointly done by operators. The operators are paid fully for the fourty
eight hours. In additions they are paid a bonus of 10 per cent of productive time. Costs are reported for
this company on the basis of thirteen four-weekly period.
The company for the purpose of computing machine hour rate includes the direct wages of the operator
and also recoups the factory overheads allocated to the machines. The following details of factory
overheads applicable to the cost centre are available:
• Depreciation 10% per annum on original cost of the machine. Original cost of the each machine is
` 52,000.
• Maintenance and repairs per week per machine is ` 60.
• Consumable stores per week per machine are ` 75.
• Power : 20 units per hour per machine at the rate of 80 paise per unit.
• Apportionment to the cost centre : Rent per annum ` 5,400, Heat and Light per annum `9,720,
foreman¡’s salary per annum `12,960 and other miscellaneous expenditure per annum ` 18,000.
Required:
(i) CALCULATE the cost of running one machine for a four-week period.
(ii) CALCULATE machine hour rate.
Ans. Effective Machine hour for four-week period
= Total working hours – unproductive set-up time
= {(48 hours × 4 weeks) – {(4 hours × 4 weeks)}
= (192 – 16) hours) = 176 hours.
(i) Computation of cost of running one machine for a four week period

(`) (`)
(A) Standing charges (per annum)
Rent 5,400.00
Heat and light 9,720.00
Forman’s salary 12,960.00
Other miscellaneous expenditure 18,000.00
Standing charges (per annum) 46,080.00
Total expenses for one machine for four week period 1,181.54
` 46,080
3 machines  13 four - week period
Wages (48 hours × 4 weeks × ` 20 × 3 operators) 11,520.00
Bonus {(176 hours × ` 20 × 3 operators) x 10%} 1,056.00
Total standing charges 13,757.54
(B) Machine Expenses
 1 
Depreciation =  52,000 × 10% ×  400.00
 13 four - week period 
Repairs and maintenance (` 60 x 4 weeks) 240.00
Consumable stores (` 75 x 4 weeks) 300.00
Power (176 hours x 20 units x ` 0 .80) 2,816.00
Total machine expenses 3,756.00
(C) Total expenses (A) + (B) 17,513.54
` 17,513.54
(ii) Machine hour rate = = 99.51
176 hours
Q-13 Explain Single and Multiple Overhead Rates.
Ans. Single and Multiple Overhead Rates:
Single overhead rate: It is one single overhead absorption rate for the whole factory.
It may be computed a s follows:
Single overhead rate = Overhead costs for the entire factory
Total quantity of the base selected
The base can be total output, total labour hours, total machine hours, etc.
The single overhead rate may be applied in factories which produces only one major product on a
continuous basis. It may also be used in factories where the work performed in each department is
fairly uniform and standardized.
Multiple overhead rate: It i nvolves computation of separate rates for each production department,
service department, cost center and each product for both fixed and variable overheads. It may be
computed as follows:
Multiple overhead rate= Overhead allocated / appportioned to each department/ cost centre or product
Corresponding base
Under multiple overhead s rate, jobs or products are charged with varying amount of factory overheads
depending on the type and number of departments through which they pass.
However, the number of overheads rate which a firm may compute would depend upon two opposing
factors viz. the degree of accuracy desired and the clerical cost involved.

Q-14 In a factory, a machine is considered to work for 208 hours in a month. It includes maintenance time of
8 hours and set up time of 20 hours.
The expense data relating to the machine are as under:
Cost of the machine is Rs. 5,00,000. Life 10 years. Estimated scrap value at the end of life is Rs. 20,000.
(Rs.)
– Repairs and maintenance per annum 60,480
– Consumable stores per annum 47,520
– Rent of building per annum
(The machine under reference occupies 1/6 of the area) 72,000
– Supervisor's salary per month (Common to three machines) 6,000
– Wages of operator per month per machine 2,500
– General lighting charges per month allocated to the machine 1,000
– Power 25 units per hour at Rs. 2 per unit
Power is required for productive purposes only. Set up time, though productive, does not require
power.
The Supervisor and Operator are permanent. Repairs and maintenance and consumable stores vary
with the running of the machine.
Required
COMPUTE a two-tier machine hour rate for (a) set up time, and (b) running time.
Ans. Working Notes:
1. (i) Effective hours for standing charges (208 hours – 8 hours) = 200 hours
(ii) Effective hours for variable costs (208 hours – 28 hours) = 180 hours
2. Standing Charges per hour
Cost per month Cost per hour (Rs.)
(Rs.) (Cost per month ÷ 200 hours)
 Rs. 6,000 
Supervisor’s salary   2,000 10.00
 3 machines 
 1 Rs. 72,000 
Rent of building  ×  1,000 5.00
 6 12 month 
General lighting 1,000 5.00
Total Standing Charges 4,000 20.00
3. Machine running expenses per hour
Cost per month (Rs.) Cost per hour (Rs.)
Depreciation 4,000 20.00
 Rs.(5,00,000 - 20,000) 1   Rs.4,000 

    
 10 years 12 months   200 hours 
Wages 2,500 12.50
 Rs.2,500 
 
 200 hours 
Repairs & Maintenance 5,040 28.00

 Rs.60,480   Rs.5,040 
   
 12 months   180 hours 
Consumable stores 3,960 22.00
 Rs.47,520   Rs. 3,960 

   
Power (25 units × Rs.2 × 180 hours) 9,000 50.00

Total Machine Expenses 24,500 132.50
Computation of Two – tier machine hour rate
Set up time rate per Running time rate per
machine hour machine hour
(Rs.) (Rs.)
Standing Charges 20.00 20.00
Machine expenses :
Depreciation 20.00 20.00
Repair and maintenance – 28.00
Consumable stores – 22.00
Power – 50.00
Machine hour rate of overheads 40.00 140.00
Wages 12.50 12.50
Comprehensive machine hour rate 52.50 152.50
Q-15 V Ltd. manufactures luggage trolleys for airports. The factory, in which the company undertakes all of
its production, has two production departments- ‘Fabrication’ and ‘Assembly’, and two service
departments- ‘Stores’ and ‘Maintenance’.
The following information have been extracted from the company’s budget for the financial year
ended 31st March, 2019:
Particulars Rs.
Allocated Overhead Costs
Fabrication Department 15,52,000
Assembly Department 7,44,000
Stores Department 2,36,000
Maintenance Department 1,96,000
Other Overheads
Factory rent 15,28,000
Factory building insurance 1,72,000
Plant & machinery insurance 1,96,000
Plant & Machinery Depreciation 2,65,000
Subsidy for staffs’ canteen 4,48,000

Direct Costs Rs. Rs.

Fabrication Department:
Material 63,26,000
Labour 8,62,000 71,88,000
Assembly Department:
Material 1,42,000
Labour 13,06,000 14,48,000
The following additional information is also provided:
Fabrication Assembly Stores Maintenance
Department Department Department Department
Floor area (square meters) 24,000 10,000 2,500 3,500
Value of plant & machinery (Rs.) 16,50,000 7,50,000 75,000 1,75,000
No. of stores requisitions 3,600 1,400 — —
Maintenance hours required 2,800 2,300 400 —
No. of employees 120 80 38 12
Machine hours 30,00,000 60,000
Labour hours 70,000 26,00,000
Required:
(i) PREPARE a table showing the distribution of overhead costs of the two service departments to the
two production departments using step method; and
(ii) Calculate the most appropriate overhead recovery rate for each department.
(iii) Using the rates calculated in part (ii) above, CALCULATE the full production costs of the following
job order:
Job number IGI2019
Direct Materials Rs. 2,30,400
Direct Labour:
Fabrication Department 240 hours @ Rs. 50 per hour
Assembly Department 180 hours @ Rs. 50 per hour
Machine hours required:
Fabrication Department 210 hours
Assembly Department 180 hours
Ans.
(i) Table of Primary Distribution of Overheads
Particulars Basis of Total Production Service
Apportionment Amount Department Departments
Fabrication Assembly Stores Maintenance
Overheads
Allocated 27,28,000 15,52,000 7,44,000 2,36,000 1,96,000
Direct Costs Actual 86,36,000 71,88,000 14,48,000 — —
Other

Overheads:
Factory rent Floor Area
(48:20:5:7) 15,28,000 9,16,800 3,82,000 95,500 1,33,700
Factory
building Floor Area
insurance (48:20:5:7) 1,72,000 1,03,200 43,000 10,750 15,050
Plant &
Machinery Value of 1,96,000 1,22,038 55,472 5,547 12,943
insurance Plant &
Machinery
(66:30:3:7)
Plant & Machinery 2,65,000 1,65,000 75,000 7,500 17,500
Depreciation
Value of Plant
& Machinery
(66:30:3:7)
Canteen No. of 4,48,000 2,15,040 1,43,360 68,096 21,504
Subsidy employees
(60:40:19:6) ________ _________ __________ _______ _______
1,39,73,000 1,02,62,078 28,90,832 4,23,393 3,96,697
Re-distribution of Service Departments’ Expenses:
Particulars Basis of Production Service Department Departments
Apportionment Fabrication Assembly Stores Maintenance
Overheads As per Primary 1,02,62,078 28,90,832 4,23,393 3,96,697
as per Primary distribution
distribution
Maintenance Maintenance 2,01,955 1,65,891 28,851 (3,96,697)
Department Hours
Cost (28:23:4:-) _________ ________ _______
1,04,64,033 30,56,723 4,52,244 —
Stores No. of Stores 3,25,616 1,26,628 (4,52,244)
Department Requisition
(18:7:-:-) ________ _______ ___ _____
1,07,89,649 31,83,351 — —
(ii) Overhead Recovery Rate
Department Apportioned Basis of Overhead Overhead Recovery Rate (Rs.)
Overhead (Rs.) Recovery Rate
(I) (II) [(I) ÷ (II)]
Fabrication 1,07,89,649 30,00,000 Machine Hours 3.60 per Machine Hour
Assembly 31,83,351 26,00,000 Labour Hours 1.22 per Labour Hour

(iii) Calculation of full production costs of Job no. IGI2019.

Particulars Amount (Rs.)
Direct Materials 2,30,400
Direct Labour:
Fabrication Deptt. (240 hours × Rs.50) 12,000
Assembly Deptt. (180 hours × Rs.50) 9,000
Production Overheads:
Fabrication Deptt. (210 hours × Rs. 3.60) 756
Assembly Deptt. (180 hours × Rs. 1.22) 220
Total Production Cost 2,52,376
Q-16 You are given the following information of the three machines of a manufacturing department of X
Ltd.:
Preliminary estimates of expenses (per annum)
Total (Rs.) Machines
A (Rs.) B (Rs.) C (Rs.)
Depreciation 20,000 7,500 7,500 5,000
Spare parts 10,000 4,000 4,000 2,000
Power 40,000
Consumable stores 8,000 3,000 2,500 2,500
Insurance of machinery 8,000
Indirect employee cost 20,000
Building maintenance expenses 20,000
Annual interest on capital outlay 50,000 20,000 20,000 10,000
Monthly charge for rent and rates 10,000
Salary of foreman (per month) 20,000
Salary of Attendant (per month) 5,000
(The foreman and attendant control all the three machines and spend equal time on each of them.)
The following additional information is also available:
Machines
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor space (sq. ft.) 40,000 40,000 20,000
There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The manufacturing
department works 8 hours in a day but Saturdays are half days. All machines work at 90% capacity
throughout the year and 2% is reasonable for breakdown.
CALCULATE predetermined machine hour rates for the above machines after taking into consideration
the following factors:
• An increase of 15% in the price of spare parts.
• An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only.
• 20% general increase in wages rates.

Ans. Computation of Machine Hour Rate

Basis of Total (`) Machines
apportionment A (`) B (`) C (`)
(A) Standing Charges
Insurance Depreciation Basis
(3:3:2) 8,000 3,000 3,000 2,000
Indirect employee cost Direct Labour hours
(2:3:3) 24,000 6,000 9,000 9,000
Building maintenance Floor Space
expenses (2:2:1) 20,000 8,000 8,000 4,000
Rent and Rates Floor Space (2:2:1) 1,20,000 48,000 48,000 24,000
Salary of foreman Equal 2,40,000 80,000 80,000 80,000
Salary of attendant Equal 60,000 20,000 20,000 20,000
Total standing charges 4,72,000 1,65,000 1,68,000 1,39,000
Hourly rate for standing charges 84.70 86.24 71.36
(B) Machine Expenses:
Depreciation Direct 20,000 7,500 7,500 5,000
Spare parts Final estimates 13,225 4,600 5,750 2,875
Power K.W. rating (3:2:3) 40,000 15,000 10,000 15,000
Consumable Stores Direct 8,000 3,000 2,500 2,500
Total Machine expenses 81,225 30,100 25,750 25,375
Hourly Rate for Machine expenses 15.45 13.22 13.03
Total (A + B) 553,225 1,95,100 1,93,750 1,64,375
Machine Hour rate 100.15 99.46 84.38
Working Notes:
(i) Calculation of effective working hours:
No. of full off-days = No. of Sunday + No. of holidays
= 52 + 12 = 64 days
No. of half working days = 52 days – 2 holidays = 50 days
No. of full working days = 365 days – 64 days – 50 days = 251 days
Total working Hours = {(251 days × 8 hours) + (50 days × 4 hours)}
= 2,008 hours + 200 = 2,208 hours.
Total effective hours = Total working hours × 90% - 2% for break-down
= 2,208 hours × 90% - 2% (2,208 hours × 90%)
= 1,987.2 hours – 39.74 hours
= 1947.46 or Rounded up to 1948 hours.
(ii) Amount of spare parts is calculated as under :
A (`) B (`) C (`)
Preliminary estimates 4,000 4,000 2,000
Add: Increase in price @ 15% 600 600 300
4,600 4,600 2,300
Add: Increase in consumption @ 25% - 1,150 575
Estimated cost 4,600 5,750 2,875

(iii) Amount of Indirect employee cost is calculated as under:

(`)
Preliminary estimates 20,000
Add: Increase in wages @ 20% 4,000
24,000
(iv) Interest on capital outlay is a finance cost, therefore it has been excluded from the cost accounts.
Q-17 Discuss with example the level of activity method of segregating semi-variable costs into fixed and
variable costs.
Ans. Level of activity method: Under this method, the variable overhead may be determined by comparing
two levels of output with the amount of expenses at those levels. Since the fixed element does not
change, the variable element may be ascertained with the help of the following formula.
Change in the amount of expense
Change in the quantity of output
Suppose the following information is available:
Production Units Semi-variable expenses (`)
January 100 260
February 140 300
Difference 40 40
Change in Semi - variable expense ` 40
The variable cost :   Re. 1 / unit
Change in production volume 40 units
Thus, in January, the variable cost will be 100 × Re. 1 = ` 100 and the fixed cost element will be (` 260 –
` 100) or ` 160. In February, the variable cost will be 140 × Re. 1 = ` 140 whereas the fixed cost element
will remain the same, i.e., ` 160.
Q-18 EXPLAIN the difference between Allocation and Apportionment of expenses.
Ans. The difference between the allocation and apportionment is important to understand because the
purpose of these two methods is the identification of the items of cost to cost units or centers. However,
the main difference between the above methods is given below.
(1) Allocation deals with the whole items of cost, which are identifiable with any one department.
For example, indirect wages of three departments are separately obtained and hence each
department will be charged by the respective amount of wages individually.
On the other hand, apportionment deals with the proportions of an item of cost for example; the
cost of the benefit of a service department will be divided between those departments which has
availed those benefits.
(2) Allocation is a direct process of charging expenses to different cost centres whereas apportionment
is an indirect process because there is a need for the identification of the appropriate portion of
an expense to be borne by the different departments benefited.
(3) The allocation or apportionment of an expense is not dependent on its nature, but the relationship
between the expense and the cost centre decides that whether it is to be allocated or apportioned.
(4) Allocation is a much wider term than apportionment.
Q-19 The following particulars refer to process used in the treatment of material subsequently, incorporated
in a component forming part of an electrical appliance:
(i) The original cost of the machine used (Purchased in June 2008) was Rs. 10,000. Its estimated life is
10 years, the estimated scrap value at the end of its life is Rs. 1,000, and the estimated working
time per year (50 weeks of 44 hours) is 2,200 hours of which machine maintenance etc., is estimated
to take up 200 hours.

No other loss of working time expected, setting up time, estimated at 100 hours, is regarded as
productive time. (Holiday to be ignored).
(ii) Electricity used by the machine during production is 16 units per hour at cost of a 9 paisa per unit.
No current is taken during maintenance or setting up.
(iii) The machine required a chemical solution which is replaced at the end of week at a cost of Rs. 20
each time.
(iv) The estimated cost of maintenance per year is Rs. 1,200.
(v) Two attendants control the operation of machine together with five other identical machines.
Their combined weekly wages, insurance and the employer's contribution to holiday pay amount
Rs. 120.
(vi) Departmental and general works overhead allocated to this machine for the current year amount
to Rs. 2,000.
You are required to CALCULATE the machine hour rate of operating the machine.
Ans. Working Notes:
(i) Total Productive hours = Estimated Working hours – Machine Maintenance hours
= 2,200 hours – 200 hours = 2,000 hours
Rs.10,000 - Rs. 1,000
(ii) Depreciation per annum = = Rs.900
10years
(iii) Chemical solution cost per annum = Rs. 20 × 50 weeks = Rs.1,000
Rs. 120 × 50 weeks
(iv) Wages of attendants (per annum) = = Rs.1, 000
6 machines
Calculation of Machine hour rate
Particulars Amount Amount
(per annum) (per hour)
A. Standing Charge
(i) Wages of attendants 1,000
(ii) Departmental and general works overheads 2,000
Total Standing Charge 3,000
 3, 000 
Standing Charges per hour   1.5
 2, 000 
B. Machine Expense
(iii) Depreciation 900 0.45
(iv) Electricity - 1.37
 RS.0.09 × 16 units × 1, 900 hours 

 
 2, 000 hours 
(v) Chemical solution 1,000 0.50
(vi) Maintenance cost 1,200 0.60
Machine operating cost per hour (A + B) 4.42

Q-20 A Ltd. manufactures two products- A and B. The manufacturing division consists of two production
departments P1 and P2 and two service departments S1 and S2.
Budgeted overhead rates are used in the production departments to absorb factory overheads to the
products. The rate of Department P1 is based on direct machine hours, while the rate of Department P2
is based on direct labour hours. In applying overheads, the pre-determined rates are multiplied by
actual hours.
For allocating the service department costs to production departments, the basis adopted is as follows:
(i) Cost of Department S1 to Department P1 and P2 equally, and
(ii) Cost of Department S2 to Department P1 and P2 in the ratio of 2 : 1 respectively.
The following budgeted and actual data are available:
Annual profit plan data:
Factory overheads budgeted for the year:
Departments P1 27,51,000 S1 8,00,000
P2 24,50,000 S2 6,00,000
Budgeted output in units:
Product A 50,000; B 30,000.
Budgeted raw-material cost per unit:
Product A ` 120; Product B ` 150.
Budgeted time required for production per unit:
Department P1 : Product A : 1.5 machine hours
Product B : 1.0 machine hour
Department P2 : Product A : 2 Direct labour hours
Product B : 2.5 Direct labour hours
Average wage rates budgeted in Department P2 are:
Product A - ` 72 per hour and Product B – ` 75 per hour.
All materials are used in Department P1 only.
Actual data (for the month of Jan, 2020):
Units actually produced: Product A : 4,000 units
Product B : 3,000 units
Actual direct machine hours worked in Department P1:
On Product A 6,100 hours, Product B 4,150 hours.
Actual direct labour hours worked in Department P2:
On Product A 8,200 hours, Product B 7,400 hours.
Costs actually incurred: Product A Product B
` `
Raw materials 4,89,000 4,56,000
Wages 5,91,900 5,52,000
Overheads: Department P1 2,50,000 S1 80,000
P2 2,25,000 S2 60,000
(i) COMPUTE the pre-determined overhead rate for each production department.
(ii) PREPARE a performance report for Jan, 2020 that will reflect the budgeted costs and actual costs

Ans.(i) Computation of pre-determined overhead rate for each production department from budgeted data
Production Department Service Department
P1 P2 S1 S2
Budgeted factory overheads for the year (`) 27,51,000 24,50,000 8,00,000 6,00,000
Allocation of service department S1’s
costs to production departments P1 and
P2 equally (‘) 4,00,000 4,00,000 (8,00,000) —
Allocation of service department S2’s 4,00,000 2,00,000 – (6,00,000)
costs to production departments P1 and
P2 in the ratio of 2:1 (`)
Total 35,51,000 30,50,000 — —
Budgeted machine hours in department 1,05,000 —
P1 (working note-1)
Budgeted labour hours in department P2 — 1,75,000
(working note-1)
Budgeted machine/ labour hour rate (‘) 33.82 17.43
(ii) Performance report for Jan, 2020
(When 4,000 and 3,000 units of Products A and B respectively were actually produced)
Budgeted (`) Actual (`)
Raw materials used in Dept. P1:
A : 4,000 units × ` 120 4,80,000 4,89,000
B : 3,000 units × ` 150 4,50,000 4,56,000
Direct labour cost
(on the basis of labour hours worked in department P2)
A : 4,000 units × 2 hrs. × ` 72 5,76,000 5,91,900
B : 3,000 units × 2.5 hrs. × ` 75 5,62,500 5,52,000
Overhead absorbed on machine hour basis in Dept. P1:
A : 4,000 units × 1.5 hrs. × ` 33.82 2,02,920 1,96,420*
B : 3,000 units × 1 hr. × ` 33.82 1,01,460 1,33,630*
Overhead absorbed on labour hour basis in Dept. P2:
A : 4,000 units × 2 hrs. × ` 17.43 1,39,440 1,49,814**
B : 3,000 units × 2.5 hrs. × ` 17.43 1,30,725 1,35,198**
26,43,045 27,03,962
* (Refer to working note 4)
** (Refer to working note 5)
Working notes:
1.
Product A Product B Total
Budgeted output (units) 50,000 30,000
Budgeted machine hours in Dept. P1 75,000 30,000 1,05,000
(50,000×1.5 hrs.) (30,000×1 hr.)
Budgeted labour hours in Dept. P2 1,00,000 75,000 1,75,000
(50,000×2 hrs.) (30,000×2.5 hrs.)

2.
Product A Product B Total
Actual output (units) 4,000 3,000
Actual machine hours utilized in Dept. P1 6,100 4,150 10,250
Actual labour hours utilised in Dept. P2 8,200 7,400 15,600
3. Computation of actual overhead rates for each production department from actual data
Production Department Service Department
P1 P2 S1 S2
Actual factory overheads for the 2,50,000 2,25,000 80,000 60,000
month of Jan, 2020 (`)
Allocation of service Dept. S1’s costs to 40,000 40,000 (80,000) -
production Dept. P1 and P2 equally (`)
Allocation of service Dept. S2’s costs to 40,000 20,000 - (60,000)
production Dept. P1 and P2 in the ratio of 2:1 (‘)
Total 3,30,000 2,85,000 — —
Actual machine hours in Dept. P1 10,250 —
(working note 2)
Actual labour hours in Dept. P2 (working note 2) — 15,600
Actual machine/ labour hour rate (`) 32.20 18.27
4. Actual overheads absorbed (based on machine hours)
A : 6,100 hrs × ` 32.20 = (`) 1,96,420
B : 4,150 hrs × ` 32.20 = (`) 1,33,630
5. Actual overheads absorbed (based on labour hours)
A : 8,200 hrs × ` 18.27 = ` 1,49,814
B : 7,400 hrs × ` 18.27 = ` 1,35,198
Q-21 You are given the following information of the three machines of a manufacturing department of X
Ltd.:
Preliminary estimates of expenses (per annum)
Machines
Total (`)
A (`) B (`) C (`)
Depreciation 2,00,000 75,000 75,000 50,000
Spare parts 1,00,000 40,000 40,000 20,000
Power 4,00,000
Consumable stores 80,000 30,000 25,000 25,000
Insurance of machinery 80,000
Indirect labour 2,00,000
Building maintenance expenses 2,00,000
Annual interest on capital outlay 1,00,000 40,000 40,000 20,000
Monthly charge for rent and rates 20,000

Salary of foreman (per month) 42,000

Salary of Attendant (per month) 12,000
(The foreman and the attendant control all the three machines and spend equal time on them.)
The following additional information is also available:
Machines
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor space (sq. ft.) 40,000 40,000 20,000
There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The manufacturing
department works 8 hours in a day but Saturdays are half days. All machines work at 90% capacity
throughout the year and 2% is reasonable for breakdown.
CALCULATE predetermined machine hour rates for the above machines after taking into consideration
the following factors:
• An increase of 15% in the price of spare parts.
• An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only.
• 20% general increase in wages rates.
Ans.(a) Computation of Machine Hour Rate
Basis of Machines
apportionment Total (`) A (`) B (`) C (`)
(A) Standing Charges
Insurance Depreciation 80,000 30,000 30,000 20,000
Basis (3:3:2)
Indirect Labour Direct Labour 2,40,000 60,000 90,000 90,000

(2:3:3)
Building Floor Space 2,00,000 80,000 80,000 40,000
maintenance (2:2:1)
expenses
Rent and Rates Floor Space 2,40,000 96,000 96,000 48,000
(2:2:1)
Salary of foreman Equal 5,04,000 1,68,000 1,68,000 1,68,000
Salary of attendant Equal 1,44,000 48,000 48,000 48,000
Total standing charges 14,08,000 4,82,000 5,12,000 4,14,000
Hourly rate for standing charges 247.43 262.83 212.53

(B) Machine
Expenses:
Depreciation Direct 2,00,000 75,000 75,000 50,000
Spare parts Final estimates 1,32,250 46,000 57,500 28,750
Power K.W. rating 4,00,000 1,50,000 1,00,000 1,50,000
(3:2:3)
Consumable Direct 80,000 30,000 25,000 25,000
Stores
Total Machine expenses 8,12,250 3,01,000 2,57,500 2,53,750
Hourly Rate for Machine expenses 154.52 132.19 130.26
Total (A + B) 22,20,250 7,83,000 7,69,500 6,67,750
Machine Hour rate 401.95 395.02 342.79
Working Notes:
(i) Calculation of effective working hours:
No. of full off-days = No. of Sunday + No. of holidays
= 52 + 12 = 64 days
No. of half working days = 52 days – 2 holidays = 50 days
No. of full working days = 365 days – 64 days – 50 days = 251 days
Total working Hours = {(251 days × 8 hours) + (50 days × 4 hours)}
= 2,008 hours + 200= 2,208 hours.
Total effective hours = Total working hours × 90% - 2% for breakdown
= 2,208 hours × 90% - 2% (2,208 hours × 90%)
= 1,987.2 hours – 39.74 hours
= 1947.46 or Rounded up to 1948 hours.
(ii) Amount of spare parts is calculated as under:
A (`) B (`) C (`)
Preliminary estimates 40,000 40,000 20,000
Add: Increase in price @ 15% 6,000 6,000 3,000
46,000 46,000 23,000
Add: Increase in consumption “ 11,500 5,750
@ 25%
Estimated cost 46,0005 7,500 28,750
(iii) Amount of Indirect Labour is calculated as under:
(` )
Preliminary estimates 2,00,000
Add: Increase in wages @ 20% 40,000
2,40,000
(iv) Interest on capital outlay is a finance cost,therefore it has been excluded from the cost accounts.

Q-22 The following account balances and distribution of indirect charges are taken from the accounts of a
manufacturing concern for the year ending on 31st March, 2021:
Item Total Production DepartmentsService
Amount Departments
( `) X ( `) Y ( `) Z ( `) A ( `) B ( `)
Indirect Material 5,00,000 80,000 1,20,000 1,80,000 1,00,000 20,000
Indirect Labour 10,40,000 1,80,000 2,00,000 2,80,000 2,40,000 1,40,000
Supervisor’s Salary 3,84,000 - - 3,84,000 - -
Fuel & Heat 60,000
Power 7,20,000
Rent & Rates 6,00,000
Insurance of Assets 72,000
Canteen Charges 2,40,000
The following departmental data are also available:
Production Departments Service Departments
X Y Z A B
Area (Sq. ft.) 4,400 4,000 3,000 2,400 1,200
Capital Value of
Assets (‘) 40,00,000 60,00,000 50,00,000 10,00,000 20,00,000
Kilowatt Hours 3,500 4,000 3,000 1,500 -
Radiator Sections 20 40 60 50 30
No. of Employees 60 70 120 30 20
Expenses charged to the service departments are to be distributed to other departments by the
following percentages:
X Y Z A B
Department A (%) 30 30 20 - 20
Department B (%) 25 40 25 10 -
PREPARE an overhead distribution statement to show the total overheads of production departments
after re-apportioning service departments’ overhead by using simultaneous equation method. Show
all the calculations to the nearest rupee.
Ans. Primary Distribution of Overheads
Item Basis Total Production Departments Service
Amount Departments
(`) X (`) Y (`) Z (`) A (`) B (`)
Indirect Material Actual 5,00,000 80,000 1,20,000 1,80,000 1,00,000 20,000
Indirect Labour Actual 10,40,000 1,80,000 2,00,000 2,80,000 2,40,000 1,40,000
Supervisor’s Salary Actual 3,84,000 - - 3,84,000 - -
Fuel & Heat Radiator 60,000 6,000 12,000 18,000 15,000 9,000
Sections
{2:4:6:5:3}
Power Kilowatt Hours 7,20,000 2,10,000 2,40,000 1,80,000 90,000 -
{7:8:6:3:-}
Rent & Rates Area (Sq. ft.) 6,00,000 1,76,000 1,60,000 1,20,000 96,000 48,000

{22:20:15:12:6}
Insurance Capital Value 72,000 16,000 24,000 20,000 4,000 8,000
of Assets
{4:6:5:1:2}
Canteen Charges No. of 2,40,000 48,000 56,000 96,000 24,000 16,000
Employees
{6:7:12:3:2}
Depreciation Capital Value 10,80,000 2,40,000 3,60,000 3,00,000 60,000 1,20,000
of Assets
{4:6:5:1:2}
Total overheads 46,96,000 9,56,000 11,72,000 15,78,000 6,29,000 3,61,000
Re-distribution of Overheads of Service Department A and B
Total overheads of Service Departments may be distributed using simultaneous
equation method
Let, the total overheads of A = ‘a’ and the total overheads of B = ‘b’
a = 6,29,000 + 0.10 b (i)
or, 10a - b = 62,90,000 [(i) x10]
b = 3,61,000 + 0.20 a (ii)
or, -0.20a + b = 3,61,000
Solving equation (i) & (ii)
a = 6,78,673
Putting the value of ‘a’ in equation (ii), we get
b = 3,61,000 + 0.20 × 6,78,673
b = 4,96,735
Secondary Distribution of Overheads
Production Departments
X (`) Y (`) Z (`)
Total overhead as per primary distribution 9,56,000 11,72,000 15,78,000
Service Department A (80% of 6,78,673) (3:3:2) 2,03,602 2,03,602 1,35,734
Service Department B (90% of 4,96,735) (5:8:5) 1,24,184 1,98,694 1,24,184
Total 12,83,786 15,74,296 18,37,918
Q-23 A machine costing ` 10 lakhs, was purchased on 01-04-2021. The expected life of the machine is 10
years. At the end of this period its scrap value is likely to be ` 10,000. The total cost of all the machines
including new one was ` 90 lakhs.
The other information is given as follows:
(i) Working hours of the machine for the year was 4,200 including 200 non-productive hours.
(ii) Repairs and maintenance for the new machine during the year was ` 6,000.
(iii) Insurance Premium was paid for all the machine ` 9,000.

(iv) New machine consumes 8 units of electricity per hour, the rate per unit being ` 3.75
(v) The new machine occupies 1/10th area of the department. Rent of the department is ` 2,400 per
month.
(vi) Depreciation is charged on straight line basis.
COMPUTE machine hour rate for the new machine.
Ans. Computation of machine hour rate of new Machine
Total (`) Per hour (`)
A. Standing Charges
1
I. Insurance Premium ` 9,000 x 1,000
9
1
II. Rent ` 2,400 x 12 months 2,880
10
3,880 0.97*
B. Machine expenses
I. Repairs and Maintenance (` 6,000  4,000 hours) 1.50
II. Depreciation 24.75
III. Electricity (8 units x ` 3.75) 30.00

Machine hour rate 57.22
Working Note
Calculation of productive Machine hour rate
Total hours 4,200
Less: Non-Productive hours 200
Effective machine hours 4,000
* ` 3,880  4,000 hours = ` 0.97
Q-24 A machine shop has 8 identical machines manned by 6 operators. The machine cannot work without an
operator wholly engaged on it. The original cost of all the 8 machines works out to ` 32,00,000. The
following particulars are furnished for a six months period:
Normal available hours per month per operator 208
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time-hours per operator 10
Average rate of wages per day of 8 hours per operator ` 100
Production bonus estimated 10% on wages
Power consumed ` 40,250
Supervision and Indirect Labour ` 16,500
Lighting and Electricity ` 6,000
The following particulars are given for a year:
Insurance ` 3,60,000

Sundry work Expenses ` 50,000

Management Expenses allocated ` 5,00,000
Depreciation 10% on the original cost
Repairs and Maintenance (including consumables): 5% of the value of all the machines.
Prepare a statement showing the comprehensive machine hour rate for the machine shop.
Ans. Workings:
Particulars Six months 6
operators (Hours)
Normal available hours per month (208 x 6 months x 6 operators) 7,488
Less: Absenteeism hours (18 x 6 operators) (108)
Paid hours (A) 7,380
Less: Leave hours (20 x 6 operators) (120)
Less: Normal idle time (10 x 6 operators) (60)
Effective working hours 7,200
Computation of Comprehensive Machine Hour Rate
Particulars Amount for six
months (`)
Operators’ wages (7,380/8 x100) 92,250
Production bonus (10% on wages) 9,225
Power consumed 40,250
Supervision and indirect labour 16,500
Lighting and Electricity 6,000
Repair and maintenance {(5% × ` 32,00,000)/2} 80,000
Insurance (` 3,60,000/2) 1,80,000
Depreciation {(` 32,00,000 × 10%)/2} 1,60,000
Sundry Work expenses (` 50,000/2) 25,000
Management expenses (` 5,00,000/2) 2,50,000
Total Overheads for 6 months 8,59,225
Comprehensive Machine Hour Rate = ` 8,59,225/7,200 hours ` 119.33
(Note: Machine hour rate may be calculated alternatively. Further, presentation of figures may also be
done on monthly or annual basis.)
Q-25 TEE Ltd. is a manufacturing company having three production departments ‘P’, ‘Q’ and ‘R’ and two
service departments ‘X’ and ‘Y’ details pertaining to which are as under :
P Q R X Y
Direct wages (`) 5,000 1,500 4,500 2,000 800
Working hours 13,191 7,598 14,995 - -
Value of machine (`) 1,00,000 80,000 1,00,000 20,000 50,000
H.P. of machines 100 80 100 20 50
Light points (Nos.) 20 10 15 5 10
Floor space (sq. ft.) 2,000 2,500 3,500 1,000 1,000

The expenses are as follows:

(` )
Rent and Rates 10,000
General Lighting 600
Indirect Wages 3,450
Power 3,500
Depreciation on Machines 70,000
Sundries (apportionment on the basis of direct wages) 13,800
The expenses of Service Departments are allocated as under :
P Q R X Y
X 45% 15% 30% - 10%
Y 35% 25% 30% 10% -
Product ‘A’ is processed for manufacture in Departments P, Q and R for 6, 5 and 2 hours respectively.
Direct Costs of Product A are :
Direct material cost is ` 65 per unit and Direct labour cost is ` 40 per unit.
You are Required to:
(i) Prepare a statement showing distribution of overheads among the production and service
departments.
(ii) Calculate recovery rate per hour of each production department after redistributing the service
departments costs.
(iii) Find out the Total Cost of a ‘Product A’
Ans. (i) Statement showing distribution of Overheads
Primary Distribution Summary
Item of cost Basis of Total P Q R X Y
apportionment (` ) (` ) (` ) (` ) (` ) (` )
Direct wages Actual 2,800 — — — 2,000 800
Rent and Rates Floor area 10,000 2,000 2,500 3,500 1,000 1,000
(4:5:7:2:2)
General lighting Light points 600 200 100 150 50 100
(4:2:3:1:2)
Indirect wages Direct wages 3,450 1,250 375 1,125 500 200
(50:15:45:20:8)
Power Horse Power of 3,500 1,000 800 1,000 200 500
machines used
(10:8:10:2:5)
Depreciation of Value of 70,000 20,000 16,000 20,000 4,000 10,000
machinery machinery
(10:8:10:2:5)
Sundries Direct wages 13,800 5,000 1,500 4,500 2,000 800
(50:15:45:20:8)
Total 1,04,150 29,450 21,275 30,275 9,750 13,400

Secondary Distribution using simultaneous equation method:

Overheads of service cost centres
Let, X be the overhead of service cost centre X
Y be the overhead of service cost centre Y
X = 9,750 + 0.10 Y
Y = 13,400 + 0.10 X
Substituting the value of Y in X we get
X = 9,750 + 0.10 (13,400 + 0.10 X)
X = 9,750 + 1,340 + 0.01 X
0.99 X = 11,090
 X = ` 11,202
 Y = 13,400 + 0.10 x 11,202
= ` 14,520.20
Particulars Total (`) P (`) Q (`) R (`)
Allocated and Apportioned 29,450.00 21,275.00 30,275.00
over-heads as per primary
distribution
X 11,202.00 5,040.90 1,680.30 3,360.60
Y 14,520.20 5,082.07 3,630.05 4,356.06
Total 39,572.97 26,585.35 37,991.66
(ii) Calculation of Overhead recovery rate per hour
P (`) Q (`) R (`)
Total overheads cost 39,572.97 26,585.35 37,991.66
Working hours 13,191 7,598 14,995
Rate per hour (`) 3 3.50 2.53
(iii) Cost of Product A
(`)
Direct material 65.00
Direct labour 40.00
Prime cost 105.00
Production on overheads
P 6 hours x ` 3 = ` 18
Q 5 hours x ` 3.50 = ` 17.50
R 2 hours x ` 2.53 = ` 5.06 40.56
Total cost 145.56
Note: Secondary Distribution can also be done using repeated distribution Method.

Q-26 PL Ltd. has three production departments P1, P2 and P3 and two service departments S1 and S2. The
following data are extracted from the records of the company for the month of October, 2020:
( `)
Rent and rates 12,50,000
General lighting 1,50,000
Indirect Wages 3,75,000
Power 5,00,000
Depreciation on machinery 10,00,000
Insurance of machinery 4,00,000
Other Information:
P1 P2 P3 S1 S2
Direct wages ( `) 7,50,000 5,00,000 7,50,000 3,75,000 1,25,000
Horse Power of Machines used 60 30 50 10 -
Cost of machinery ( `) 60,00,000 80,00,000 1,00,00,000 5,00,000 5,00,000
Floor space (Sq. ft) 2,000 2,500 3,000 2,000 500
Number of light points 10 15 20 10 5
Production hours worked 6,225 4,050 4,100 - -
Expenses of the service departments S1 and S2 are reapportioned as below:
P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10%
Required:
(i) COMPUTE overhead absorption rate per production hour of each production department.
(ii) DETERMINE the total cost of product X which is processed for manufacture in department P1, P2
and P3 for 5 hours, 3 hours and 4 hours respectively, given that its direct material cost is ` 12,500
and direct labour cost is ` 7,500.
Ans. Primary Distribution Summary
Item of cost Basis of Total P1 P2 P3 S1 S2
apportionment ( `) ( `) ( `) ( `) ( `) ( `)
Direct wages Actual 5,00,000 — — — 3,75,000 1,25,000
Rent and Floor area 12,50,000 2,50,000 3,12,500 3,75,000 2,50,000 62,500
Rates (4 : 5 : 6 : 4 : 1)
General Light points 1,50,000 25,000 37,500 50,000 25,000 12,500
lighting (2 : 3 : 4 : 2 : 1)
Indirect wages Direct wages 3,75,000 1,12,500 75,000 1,12,500 56,250 18,750
(6 : 4 : 6 : 3 : 1)
Power Horse Power of 5,00,000 2,00,000 1,00,000 1,66,667 33,333 -
machines used
(6 : 3 : 5 : 1)
Depreciation of Value of machinery 10,00,000 2,40,000 3,20,000 4,00,000 20,000 20,000
machinery (12 : 16 : 20 : 1 : 1)
Insurance of Value of machinery 4,00,000 96,000 1,28,000 1,60,000 8,000 8,000
machinery (12 : 16 : 20 : 1 : 1)
41,75,000 9,23,500 9,73,000 12,64,167 7,67,583 2,46,750
Overheads of service cost centres
Let S1 be the overhead of service cost centre S1 and S2 be the overhead of service cost centre S2.

S1 = 7,67,583 + 0.10 S2
S2 = 2,46,750 + 0.10 S1
Substituting the value of S2 in S1 we get
S1 = 7,67,583 + 0.10 (2,46,750 + 0.10 S1)
S1 = 7,67,583 + 24,675 + 0.01 S1
0.99 S1 = 7,92,258
S1 = ` 8,00,260
 S2 = 2,46,750 + 0.10 x 8,00,260
= ` 3,26,776
Particulars Total ( `) P1 ( `) P2 ( `) P3 ( `)
Allocated and Apportioned 31,60,667 9,23,500 9,73,000 12,64,167
over-heads as per primary
distribution
S1 8,00,260 1,60,052 2,40,078 3,20,104
S2 3,26,776 1,30,710 65,355 98,033
12,14,262 12,78,433 16,82,304
(i) Overhead rate per hour
P1 P2 P3
Total overheads cost ( `) 12,14,262 12,78,433 16,82,304
Production hours worked 6,225 4,050 4,100
Rate per hour ( `) 195.06 315.67 410.32
(ii) Cost of Product X
( `)
Direct material 12,500.00
Direct labour 7,500.00
Prime cost 20,000.00
Production on overheads
P1 5 hours x ` 195.06 = 975.30
P2 3 hours x ` 315.67 = 947.01
P3 4 hours x ` 410.32 = 1,641.28 3,563.59
Factory cost 23,563.59
Q-27 A manufacturing unit has purchased and installed a new machine at a cost of ` 24,90,000 to its fleet of
5 existing machines. The new machine has an estimated life of 12 years and is expected to realise ‘
90,000 as scrap value at the end of its working life.
Other relevant data are as follows:
(i) Budgeted working hours are 2,496 based on 8 hours per day for 312 days. Plant maintenance work
is carried out on weekends when production is totally halted. The estimated maintenance hours
are 416. During the production hours machine set -up and change over works are carried out.
During the set-up hours no production is done.
A total 312 hours are required for machine set-ups and change overs.
(ii) An estimated cost of maintenance of the machine is ` 2,40,000 p.a.
(iii) The machine requires a component to be replaced every week at a cost of ` 2,400.
(iv) There are three operators to control the operations of all the 6 machines. Each operator is paid `
30,000 per month plus 20% fringe benefits.

(v) Electricity: During the production hours including set -up hours, the machine consumes 60 units
per hour. During the maintenance the machine consumes only 10 units per hour. Rate of electricity
per unit of consumption is ` 6.
(vi) Departmental and general works overhead allocated to the operation during last year was `
5,00,000. During the current year it is estimated to increase by 10%.
Required:
COMPUTE the machine hour rate.
Ans. Working Note:
1. Effective machine hour:
= Budgeted working hours – Machine Set-up time
= 2,496 hours – 312 hours = 2,184 hours.
2. Operators’ salary per annum:
Salary (3 operators × ` 30,000 × 12 months) ` 10,80,000
Add: Fringe benefits (20% of ` 10,80,000) ` 2,16,000
` 12,96,000
3. Depreciation per annum
`24,900 -`90,000
= ` 2,00,000
12 years
Computation of Machine hour Rate
Amount Amount per
p.a. ( `) hour ( `)
Standing charges
Operators’ Salary 2,96,000 98.90
Departmental and general overheads : 5,50,000 41.97

( ` 5,00,000 × 110%)
(A) 18,46,000 140.87

Machine Expenses
Depreciation 2,00,000 91.58
Electricity:
During working hours (2,496 hours × 60 units x ‘6) 8,98,560 411.43
During maintenance hours (416 hours × 10 units x ‘6) 24,960 11.43
Component replacement cost (2,400 × 52 weeks) 1,24,800 57.14
Machine maintenance cost 2,40,000 109.89
(B) 14,88,320 681.47
Machine Hour Rate (A + B) 822.34

Q-28 Specify the types of Responsibility centres under the following situations:
(i) Purchase of bonds, stocks, or real estate property.
(ii) Ticket counter in a Railway station.
(iii) Decentralized branches of an organization.
(iv) Maharana, Navratna and Miniratna public sector undertaking (PSU) of Central Government.
(v) Sales Department of an organization.
Ans.
Particulars Types of
Responsibility Centre
(i) Purchase of bonds, stocks, or real estate property. Investment Centre
(ii) Ticket counter in a Railway station. Revenue Centre
(iii) Decentralized branches of an organization. Profit Centre
(iv) Maharatna, Navratna and Miniratna public sector
undertaking (PSU) of Central Government. Investment Centre
(v) Sales Department of an organization. Revenue Centre
Q-29 Explain Blanket Overhead Rate and Departmental Overhead Rate. How they are calculated? State the
conditions required for the application of Blanket Overhead Rate.
Ans. Blanket Overhead Rate: Blanket overhead rate refers to the computation of one single overhead rate
for the whole factory.
This overhead rate is computed as follows:
Blanket Rate = Total overheads for the factory
Total number of units of base for the factory
Departmental Overhead Rate: It refers to the computation of one single overhead rate for a particular
production unit or department.
This overhead rate is determined by the following formula:
Departmental overhead Rate = Overheads of department or cost centre
Corresponding base
Conditions required for the Application of Blanket Overhead:
A blanket rate should be applied in the following cases:
(1) Where only one major product is being produced.
(2) Where several products are produced, but
(a) All products pass through all departments; and
(b) All products are processed for the same length of time in each department.

Q-30 Pretz Ltd. is a manufacturing company having two production departments, ‘A’ & ‘B’ and two service
departments ‘X’ & ‘Y’. The following is the budget for March, 2022:
Total (`) A (`) B (`) X (`) Y (`)
Direct material 2,00,000 4,00,000 4,00,000 2,00,000
Direct wages 10,00,000 4,00,000 2,00,000 4,00,000
Factory rent 9,00,000
Power (Machine) 5,10,000
General Lighting 3,00,000
Perquisites 4,00,000
Additional information:
Area (Sq. ft.) 500 250 250 500
Capital value of assets (‘ lakhs) 40 80 20 20
Light Points 10 20 10 10
Machine hours 1,000 2,000 1,000 1,000
Horse power of machines 50 40 15 25
A technical assessment of the apportionment of expenses of service departments is as under:
A B X Y
Service Dept. ‘X’ (%) 55 25 – 20
Service Dept. ‘Y’ (%) 60 35 5 –
(a) PREPARE a statement showing distribution of overheads to various departments.
(b) PREPARE a statement showing re-distribution of service departments expenses to production
departments using-
(i) Simultaneous equation method
(ii) Trial and error method
(iii) Repeated Distribution Method.
Ans.
(a) Primary Distribution of Overheads
Basis Total (`) A (`) B (`) X (`) Y (`)
Direct materials Direct 6,00,000 – – 4,00,000 2,00,000
Direct wages Direct 6,00,000 – – 2,00,000 4,00,000
Factory rent Area 9,00,000 3,00,000 1,50,000 1,50,000 3,00,000
(2:1:1:2)
Power H.P. × Machine 5,10,000 1,50,000 2,40,000 45,000 75,000
(Machine) Hrs.
(10:16:3:5)*
Depreciation Capital value 2,00,000 50,000 1,00,000 25,000 25,000
(2:4:1:1)
General Light Points 3,00,000 60,000 1,20,000 60,000 60,000
Lighting
(1:2:1:1)
Perquisites Direct Wages 4,00,000 2,00,000 80,000 40,000 80,000
(5:2:1:2)
35,10,000 7,60,000 6,90,000 9,20,000 11,40,000

*{(1000×50) : (2000×40) : (1000×15) : (1000×25)}

(50000 : 80000 : 15000 : 25000)
(10 : 16 : 3 : 5)
(b) (i) Redistribution of Service Department’s expenses using ‘Simultaneous equation method’
X = 9,20,000 + 0.05 Y
Y = 11,40,000 + 0.20 X
Substituting the value of X,
Y = 11,40,000 + 0.20 (9,20,000 + 0.05 Y)
= 13,24,000 + 0.01 Y
Y - 0.01Y = 13,24,000
Y = 13,24,000/0.99
Y = ` 13,37,374
The total expense of Y is ‘ 13,37,374 and that of X is ` 9,86,869 i.e., ` 9,20,000 + (0.05 × ` 13,37,374).
Distribution of Service departments’ overheads to Production departments
A (`) B (`)
Overhead as per primary distribution 7,60,000 6,90,000
Dept- X (55% and 25% of ` 9,86,869) 5,42,778 2,46,717
Dept- Y (60% and 35% of ` 13,37,374) 8,02,424 4,68,081
21,05,202 14,04,798
(ii) Redistribution of Service Department’s expenses using ‘Trial and Error Method’:
Service Departments
X (`) Y (`)
Overheads as per primary distribution 9,20,000 11,40,000
(i) Apportionment of Dept-X expenses to Dept-Y
(20% of ` 9,20,000) — 1,84,000
— 13,24,000
(ii) Apportionment of Dept-Y expenses to Dept-X
(5% of ` 13,24,000) 66,200 —
(20% of ` 66,200) — 13,240
(5% of ` 13,240) 662 —
(20% of ` 662) 132
(5% of ` 132) 7
Total 9,86,869 13,37,372
Distribution of Service departments’ overheads to Production departments
A (`) B (`)
Overhead as per primary distribution 7,60,000 6,90,000
Dept- X (55% and 25% of ` 9,86,869) 5,42,778 2,46,717
Dept- Y (60% and 35% of ` 13,37,372) 8,02,423 4,68,080
21,05,201 14,04,797

(iii) Redistribution of Service Department’s expenses using ‘repeated distribution method’:

A (`) B (`) X (`) Y (`)
Overhead as per primary distribution 7,60,000 6,90,000 9,20,000 11,40,000
Dept. X overhead apportioned in the
ratio (55:25:—:20) 5,06,000 2,30,000 (9,20,000) 1,84,000
Dept. Y overhead apportioned in
the ratio (60:35:5: —) 7,94,400 4,63,400 66,200 (13,24,000)
ratio (55:25:—:20) 36,410 16,550 (66,200) 13,240
Dept. Y overhead apportioned in the
ratio (60:35:5: —) 7,944 4,634 662 (13,240)
ratio (55:25:—:20) 364 166 (662) 132
Dept. Y overhead apportioned
in the ratio (60:35:5: —) 79 46 7 (132)
ratio (55:25:—:20) 4 3 (7) -
21,05,201 14,04,799 - -
Q-31 XYZ Ltd. manufactures a single product. It recovers factory overheads at a pre-determined rate of ` 20
per man-day.
During the year 2020-21, the total factory overheads incurred and the man-days actually worked were
` 35.50 lakhs and 1.50 lakh days respectively. Out of the amount of ` 35.50 lakhs, ` 2.00 lakhs were in
respect of wages for stick period and ` 1.00 lakh was in respect of expenses of previous year booked in
this current year. During the period, 50,000 units were sold. At the end of the period, 12,000 completed
units were held in stock but there was no opening stock of finished goods. Similarly, there was no stock
of uncompleted units at the beginning of the period but at the end of the period there were 20,000
uncompleted units which may be treated as 65% complete in all respects.
On investigation, it was found that 40% of the unabsorbed overheads were due to factory inefficiency
and the rest were attributable to increase in the cost of indirect materials and indirect labour. You are
required to:
(i) Calculate the amount of unabsorbed overheads during the year 2020-21.
(ii) Show the accounting treatment of unabsorbed overheads in cost accounts and pass journal entry.
Answer
(i) Amount of under-absorption of overheads during the year 2020-21
(`)
Total production overheads actually incurred during the year 2020-21 35,50,000
Less: Wages paid during strike period `2,00,000
Wages of previous year booked in current year ` 1,00,000 3,00,000
Net production overheads actually incurred: (A) 32,50,000

Production overheads absorbed by 1.50 lakh man-days @ ` 20 per man-day: (B) 30,00,000
Amount of under-absorption of production overheads: [(A)–(B)] 2,50,000

(ii) Accounting treatment of under absorption of production overheads: It is given in the statement of the
question that 62,000 units (50,000 sold + 12,000 closing stock – 0 opening stock) were completely
finished and 20,000 units were 65% complete, 40% of the under-absorbed overheads were due to
factory inefficiency and the rest were attributable to increase in cost of indirect materials and indirect
labour.
(`)
1. (40% of `2,50,000) i.e. ` 1,00,000 of under – absorbed overheads were 1,00,000
due to factory inefficiency. This being abnormal, should be debited to the
Costing Profit and Loss A/c
2. Balance (60% of ` 2,50,000) i.e. ` 1,50,000 of under – absorbed 1,50,000
overheads should be distributed over work-in-progress, finished
goods and cost of sales by using supplementary rate
Total under-absorbed overheads 2,50,000
Apportionment of unabsorbed overheads of `1,50,000 over work-in-progress, finished goods and cost
of sales.
Equivalent (` )
Completed units
Work-in-progress (13,000 units × ` 2)
(Refer to Working Note) 20000 * 65% = 13,000 26,000
Finished goods (12,000 units × ` 2) 12,000 24,000
Cost of sales (50,000 units × ` 2) 50,000 1,00,000
75,000 1,50,000
Journal entry:
Work-in-progress control A/c Dr. ` 26,000
Finished goods control A/c Dr. ` 24,000
Cost of Sales A/c Dr. ` 1,00,000
Costing Profit & Loss A/c Dr. ` 1,00,000
To Overhead control A/c ` 2,50,000
Working Note:
`1, 50, 000
Supplementary overhead absorption rate = = ` 2 per unit
75, 000 units
Q-32 M/s Avyukt Automobile Parts has four identical machines in its factory. Cost of each machine is `
5,00,000 with expected scrap value of 10% at the end of its effective life (9 years). The expected annual
running hours of machine is expected to run for 2,200 hours. The other details in respect of the machine
shop are:
(I) Factory Rent ` 5,000 per month
(II) Lighting of Factory ` 3,000 per month
(III) Operator Wages (Two operators and each operator is in charge of two machines)
`10,000 per month (per Operator)
(IV) Fixed repairs and maintenance charges per machine ` 2,000 per quarter
(V) Insurance premium for the machine (Annual) 3% of cost
(VI) Forman’s salary (Devoted 1/6th of his time to this factory)
` 2,500 per month

(VII) Other factory overhead (Annual) `40,000

(VIII)Power Consumption per machine per hour 80 units
(IX) Rate of Power ` 150 for 100 units
(X) Unproductive Hours lost during repairs 50 per annum
(XI) nproductive Hours Lost while Job Setting 650 per annum
You are required to COMPUTE a comprehensive machine hour rate assuming power is used during
operating time only.
Ans. Computation of Comprehensive Machine Hour Rate per Machine
Particulars Per Annum (`) Per Hour (`)
Standing Charges:
Depreciation (Working Note 2) 50,000
Factory Rent (` 5,000 x 12 months / 4) 15,000
Lighting of Factory (` 3,000 x 12 months / 4) 9,000
Operator Wages (` 10,000 x 12 months / 2) 60,000
Repairs and maintenance (` 2,000 x 4) 8,000
Insurance premium (` 5,00,000 x 3%) 15,000
1
Forman fs salary (` 2,500 x 12 x / 4) 1,250
6
Other factory overhead (` 40,000 / 4) 10,000
Standing Charges per hour (` 1,68,250 / 1,500 hours) 1,68,250
Running Charges: 112.17
Power (80 units x ` 150 / 100) 120.00
Comprehensive Machine Hour Rate 232.17
Working Notes:
1. Computation of Total Operative Hours
Total Running Hours: 2,200
Less: Unproductive hours lost during repairs 50
Less: Unproductive hours Lost while Job Setting 650
Total Operative Hours 1,500 per annum
2. Calculation of Annual Depreciation
Annual Depreciation =
= ` 50,000

Q-33 PM Ltd. has three Production Departments P1, P2, P3 and two Service Departments S1 and S2 details
pertaining to which are as under:
P1 P2 P3 S1 S2
Direct wages (`) 60,000 40,000 60,000 30,000 3,900
Working hours 3,070 4,475 2,419 - -
Value of machines (`) 12,00,000 16,00,000 20,00,000 1,00,000 1,00,000
H.P. of machines 60 30 50 10 -
Light points 10 15 20 10 5
Floor space (sq. ft.) 2,000 2,500 3,000 2,000 500
The following figures extracted from the accounting records are relevant:
(` )
Rent and Rates 1,00,000
General Lighting 12,000
Indirect Wages 38,780
Power 30,000
Depreciation on Machines 2,00,000
Sundries 1,93,900
The expenses of the service departments are allocated as under:
P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -
DETERMINE the total cost of product X which is processed for manufacture in Departments P1, P2 and P3
for 4, 5 and 3 hours respectively, given that its Direct Material Cost is ‘ 1,000 and Direct Labour Cost is ‘
600.
Ans. Statement Showing Distribution of Overheads of PM Ltd.
Particulars Basis Total Production Service
Departments Departments
P1 P2 P3 S1 S2
(`) (`) (`) (`) (`) (`)
Direct wages Actual 33,900 - - - 30,000 3,900
Rent & rates Area 1,00,000 20,000 25,000 30,000 20,000 5,000
General
lighting Light points 12,000 2,000 3,000 4,000 2,000 1,000
Indirect
wages Direct wages 38,780 12,000 8,000 12,000 6,000 780
Power H.P. 30,000 12,000 6,000 10,000 2,000 -
Depreciation
of machines Value of 2,00,000 48,000 64,000 80,000 4,000 4,000
machines
Sundries Direct 1,93,900 60,000 40,000 60,000 30,000 3,900
wages
6,08,580 1,54,000 1,46,000 1,96,000 94,000 18,580

Redistribution of Service Department’s Expenses over Production Departments

P1 (`) P2 (`) P3 (`) S1 (`) S2 (`)
Total overhead distributed as above 1,54,000 1,46,000 1,96,000 94,000 18,580
Dept. S1 Overheads apportioned
(20:30:40:—:10) 18,800 28,200 37,600 (94,000) 9,400
Dept. S2 overheads apportioned 11,192 5,596 8,394 2,798 (27,980)
(40:20:30:10:—)
Dept. S1 Overheads apportioned
(20:30:40:—:10) 560 839 1,119 (2,798) 280
Dept. S2 overheads apportioned
(40:20:30:10:—) 124 63 93 - (280)
1,84,676 1,80,698 2,43,206 - -
Working hours 3,070 4,475 2,419
Rate per hour 60.16 40.38 100.54
Determination of total cost of Product ‘X’
(`)
Direct material cost 1,000.00
Direct labour cost 600.00
Overhead cost (See working note) 744.14
2,344.14
Working Note:
Overhead cost
= (` 60.16 × 4 hrs.) + (` 40.38 × 5 hrs.) + (` 100.54 × 3 hrs.)
= ` 240.62 + ` 201.90 + ` 301.62 = ` 744.14
---0---0---

CHAPTER- 5
ACTIVITY BASED COSTING
Q-1 Following are the data of three product lines of a departmental store for the year 2019-20:
Soft drinks Fresh produce Packaged food
Revenues ` 39,67,500 ` 1,05,03,000 ` 60,49,500
Cost of goods sold ` 30,00,000 ` 75,00,000 ` 45,00,000
Cost of bottles returned ` 60,000 `0 `0
Number of purchase orders placed 360 840 360
Number of deliveries received 300 2,190 660
Hours of shelf-stocking time 540 5,400 2,700
Items sold 1,26,000 11,04,000 3,06,000
Additional information related with the store are as follows:
Activity Description of activity Total Cost Cost-allocation base
Bottles returns Returning of empty bottles ` 60,000 Direct tracing to soft drink line
Ordering Placing of orders for purchases ` 7,80,000 1,560 purchase orders
Delivery Physical delivery and
receipt of goods ` 12,60,000 3,150 deliveries
Shelf stocking Stocking of goods on store
shelves and on-going restocking ` 8,64,000 8,640 hours of shelf-stocking
time
Customer Assistance provided to
Support customers including check-out ` 15,36,000 15,36,000 items sold
Required:
CALCULATE the total cost and operating income using Activity Based Costing method.
Ans. Working notes:
(i) Total support cost:
(` )
Bottles returns 60,000
Ordering 7,80,000
Delivery 12,60,000
Shelf stocking 8,64,000
Customer support 15,36,000
Total support cost 45,00,000

(ii) Cost for each activity cost driver:

Activity Total cost (`) Cost allocation base Cost driver rate
(1) (2) (3) (4) = [(2) ÷ (3)]
Ordering 7,80,000 1,560 purchase orders ` 500 per purchase order
Delivery 12,60,000 3,150 deliveries ` 400 per delivery
Shelf-stocking 8,64,000 8,640 hours ` 100 per stocking hour
Customer support 15,36,000 15,36,000 items sold `1 per item sold
Statement of Total cost and Operating income
Soft Fresh Packaged Total
drinks (`) Produce (`) Food (`) (` )
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost & Goods sold 30,00,000 75,00,000 45,00,000 1,50,00,000
Bottle return costs 60,000 0 0 60,000
Ordering cost* (360:840:360) 1,80,000 4,20,000 1,80,000 7,80,000
Delivery cost* (300:2190:660) 1,20,000 8,76,000 2,64,000 12,60,000
Shelf stocking cost* (540:5400:2700) 54,000 5,40,000 2,70,000 8,64,000
Customer Support cost*
(1,26,000:11,04,000:3,06,000) 1,26,000 11,04,000 3,06,000 15,36,000
Total cost: (B) 35,40,000 1,04,40,000 55,20,000 1,95,00,000
Operating income C:{(A)- (B)} 4,27,500 63,000 5,29,500 10,20,000
* Refer to working note (ii)
Q-2 SMP Pvt. Ltd. manufactures three products using three different machines. At present the overheads
are charged to products using labour hours. The following statement for the month of September 2019,
using the absorption costing method has been prepared:
Particulars Product X Product Y Product Z
(using machine A) (using machine B) (using machine C)
Production units 45,000 52,500 30,000
Material cost per unit (`) 350 460 410
Wages per unit @ ‘80 perhour 240 400 560
Overhead cost per unit (`) 240 400 560
Total cost per unit (`) 830 1,260 1,530
Selling price (`) 1,037.50 1,575 1,912.50
The following additional information is available relating to overhead cost drivers.
Cost driver Product X Product Y Product Z Total
No. of machine set-ups 40 160 400 600
No. of purchase orders 400 800 1,200 2,400
No. of customers 1,000 2,200 4,800 8,000
Actual production and budgeted production for the month is same. Workers are paid at standard rate.
-136- Chapter-5 : Activity Based Costing

Out of total overhead costs, 30% related to machine set-ups, 30% related to customer order processing
and customer complaint management, while the balance proportion related to material ordering.
Required:
(i) COMPUTE overhead cost per unit using activity based costing method.
(ii) DETERMINE the selling price of each product based on activity-based costing withthe same profit
mark-up on cost.
Ans. Workings:
Total labour hours and overhead cost:
Particulars Product X Product Y Product Z Total
Production units 45,000 52,500 30,000 1,27,500
Hour per unit 3 5 7
Total hours 1,35,000 2,62,500 2,10,000 6,07,500
Rate per hour ` 80.00
Total overhead ` 4,86,00,000
Cost per activity and driver
Activity Machine Customer Customer Total
Set-up order complaint
processing management
Total overhead (`) 1,45,80,000 1,45,80,000 1,94,40,000 4,86,00,000
No. of drivers 600 2,400 8,000
Cost per driver (`) 24,300 6,075 2,430
(i) Computation of Overhead cost per unit:
No. of machine set-ups 40 160 400
Cost per driver (`) 24,300 24,300 24,300
Total Machine set-up cost (`) [A] 9,72,000 38,88,000 97,20,000
No. of purchase orders 400 800 1,200
Cost per driver (`) 6,075 6,075 6,075
Total order processing cost (`)[B] 24,30,000 48,60,000 72,90,000
No. of customers 1,000 2,200 4,800
Cost per driver (`) 2,430 2,430 2,430
Total customer complaint
management cost (`) [C] 24,30,000 53,46,000 1,16,64,000
Total Overhead cost (`) [A+B+C] 58,32,000 1,40,94,000 2,86,74,000
Production units 45,000 52,500 30,000
Cost per unit (`) 129.60 268.46 955.80

(ii) Determination of Selling price per unit

(using machine A) (using machine B) (using machine C)
Material cost per unit (`) 350.00 460.00 410.00
Wages per unit @ ` 80 perhour 240.00 400.00 560.00
Overhead cost per unit (`) 129.60 268.46 955.80
Total cost per unit (`) 719.60 1,128.46 1,925.80
Profit (25% profit mark-up)(`) 179.90 282.11 481.45
Selling price (`) 899.50 1,410.57 2,407.25
Q-3 Family Store wants information about the profitability of individual product lines: Soft drinks, Fresh
produce and Packaged food. Family store provides the following data for the year 20X7-X8 for each
product line:
Revenues ` 39,67,500 ` 1,05,03,000 ` 60,49,500
Items sold 1,26,000 11,04,000 3,06,000
Family store also provides the following information for the year 20X7-X8:
Bottles returns Returning of empty bottles ` 60,000 Direct tracing to soft
drink line
Delivery Physical delivery and receipt of goods ` 12,60,000 3,150 deliveries
Shelf stocking Stocking of goods on store shelves ` 8,64,000 8,640 hours of shelf-
and on-going restocking stocking time
Customer Assistance provided to ` 15,36,000 15,36,000 items sold
Support customers including check-out
Required:
(i) Family store currently allocates support cost (all cost other than cost of goods sold) to product lines on
the basis of cost of goods sold of each product line. CALCULATE the operating income and operating
income as a % of revenues for each product line.
(ii) If Family Store allocates support costs (all costs other than cost of goods sold) to product lines using and
activity based costing system, Calculate the operating income and operating income as a % of revenues
for each product line.

Ans.
(i) Statement of Operating income and Operating income as a percentage of revenues for each product
line
(When support costs are allocated to product lines on the basis of cost of goods sold of each product)
Drinks Produce Foods
(`) (`) (`) (`)
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost of Goods sold (COGS): (B) 30,00,000 75,00,000 45,00,000 1,50,00,000
Support cost (30% of COGS): (C)
(Refer working notes) 9,00,000 22,50,000 13,50,000 45,00,000
Total cost: (D) = {(B) + (C)} 39,00,000 97,50,000 58,50,000 1,95,00,000
Operating income: E= {(A)-(D)} 67,500 7,53,000 1,99,500 10,20,000
Operating income as a percentage
of revenues: (E/A) × 100) 1.70% 7.17% 3.30% 4.97%
Working notes:
1. Total support cost:
(`)
Ordering 7,80,000
Delivery 12,60,000
2. Percentage of support cost to cost of goods sold (COGS):
Total support cost

=  100
Total cost of goods sold
` 45,00,000
 100 = 30%
`1, 50,00,000
3. Cost for each activity cost driver:
(1) (2) (3) (4) = [(2) ÷ (3)]
Ordering 7,80,000 1,560 purchase orders `500 per purchase order
Delivery 12,60,000 3,150 deliveries `400 per delivery
Shelf-stocking 8,64,000 8,640 hours `100 per stocking hour

(ii) Statement of Operating income and Operating income as a percentage of revenues for each product
line
(When support costs are allocated to product lines using an activity-based costing system)
drinks (`) Produce (`) Food (`) (`)
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost & Goods sold 30,00,000 75,00,000 45,00,000 1,50,00,000
Ordering cost* 1,80,000 4,20,000 1,80,000 7,80,000
(360:840:360)
Delivery cost* 1,20,000 8,76,000 2,64,000 12,60,000
(300:2190:660)
Shelf stocking cost* 54,000 5,40,000 2,70,000 8,64,000
(540:5400:2700)
Customer Support cost* 1,26,000 11,04,000 3,06,000 15,36,000
(1,26,000:11,04,000:3,06,000)
Total cost: (B) 35,40,000 1,04,40,000 55,20,000 1,95,00,000
Operating income C: {(A)- (B)} 4,27,500 63,000 5,29,500 10,20,000
Operating income as a % of revenues 10.78% 0.60% 8.75% 4.97%
* Refer to working note 3
Q-4 Family Store wants information about the profitability of individual product lines: Soft drinks, Fresh
produce and Packaged food. Family store provides the following data for the year 20X7-X8 for each
product line:
Revenues ` 39,67,500 ` 1,05,03,000 ` 60,49,500
Items sold 1,26,000 11,04,000 3,06,000
Family store also provides the following information for the year 20X7-X8:
Bottles returns Returning of empty bottles ` 60,000 Direct tracing to soft
drink line
Delivery Physical delivery and receipt of goods ` 12,60,000 3,150 deliveries
Shelf stocking Stocking of goods on store shelves ` 8,64,000 8,640 hours of shelf-
and on-going restocking stocking time
Customer Assistance provided to ` 15,36,000 15,36,000 items sold
Support customers including check-out

Required:
(i) Family store currently allocates support cost (all cost other than cost of goods sold) to product lines on
the basis of cost of goods sold of each product line. CALCULATE the operating income and operating
income as a % of revenues for each product line.
(ii) If Family Store allocates support costs (all costs other than cost of goods sold) to product lines using and
activity based costing system, CALCULATE the operating income and operating income as a % of revenues
for each product line.
Ans.
(i) Statement of Operating income and Operating income as a percentage of revenues for each product
line
Drinks Produce Foods
(`) (`) (`) (`)
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost of Goods sold (COGS): (B) 30,00,000 75,00,000 45,00,000 1,50,00,000
Total cost: (D) = {(B) + (C)} 39,00,000 97,50,000 58,50,000 1,95,00,000
Operating income: E= {(A)-(D)} 67,500 7,53,000 1,99,500 10,20,000
Operating income as a percentage
of revenues: (E/A) × 100) 1.70% 7.17% 3.30% 4.97%
Working notes:
(`)
Ordering 7,80,000
Delivery 12,60,000
Total support cost
=  100
Total cost of goods sold
` 45,00,000
 100 = 30%
`1, 50,00,000


Activity Total cost Cost allocation base Cost driver rate
(1) (` )
(2) (3) (4) = [(2) ÷ (3)]
Ordering 7,80,000 1,560 purchase orders `500 per purchase order
Delivery 12,60,000 3,150 deliveries `400 per delivery
Shelf-stocking 8,64,000 8,640 hours `100 per stocking hour
(ii) Statement of Operating income and Operating income as a percentage of revenues for each product
line
drinks (`) Produce (`) Food (`) (`)
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost & Goods sold 30,00,000 75,00,000 45,00,000 1,50,00,000
Ordering cost* 1,80,000 4,20,000 1,80,000 7,80,000
(360:840:360)
Delivery cost* 1,20,000 8,76,000 2,64,000 12,60,000
(300:2190:660)
Shelf stocking cost* 54,000 5,40,000 2,70,000 8,64,000
(540:5400:2700)
Customer Support cost* 1,26,000 11,04,000 3,06,000 15,36,000
(1,26,000:11,04,000:3,06,000)
Total cost: (B) 35,40,000 1,04,40,000 55,20,000 1,95,00,000
Operating income C: {(A)- (B)} 4,27,500 63,000 5,29,500 10,20,000
Q-5 G-2020 Ltd. is a manufacturer of a range of goods. The cost structure of its different products is as
follows:
Particulars Product Product Product
A B C
Direct Materials 50 40 40 `/u
Direct Labour @ ` 10/ hour 30 40 50 `/u
Production Overheads 30 40 50 `/u
Total Cost 110 120 140 `/u
Quantity Produced 10,000 20,000 30,000 Units
G-2020 Ltd. was absorbing overheads on the basis of direct labour hours. A newly appointed management
accountant has suggested that the company should introduce ABC system and has identified cost
drivers and cost pools as follows:

Activity Cost Pool Cost Driver Associated Cost (`)

Stores Receiving Purchase Requisitions 2,96,000
Inspection Number of Production Runs 8,94,000
Dispatch Orders Executed 2,10,000
Machine Setup Number of Setups 12,00,000
The following information is also supplied:
Details Product A Product B Product C
No. of Setups 360 390 450
No. of Orders Executed 180 270 300
No. of Production Runs 750 1,050 1,200
No. of Purchase Requisitions 300 450 500
Required : CALCULATE activity based production cost of all the three products.
Ans. The total production overheads are `26,00,000:
Product A: 10,000 × ` 30 = ` 3,00,000
Product B: 20,000 × ` 40 = ` 8,00,000
Product C: 30,000 × ` 50 = ` 15,00,000
On the basis of ABC analysis this amount will be apportioned as follows:
Statement Showing “Activity Based Production Cost”
Activity Cost Driver Ratio Total A (`) B (`) C (`)
Cost Pool Amount (`)
Stores Purchase 6:9:10 2,96,000 71,040 1,06,560 1,18,400
Receiving Requisition
Inspection Production 5:7:8 8,94,000 2,23,500 3,12,900 3,57,600
Runs
Dispatch Orders 6:9:10 2,10,000 50,400 75,600 84,000
Executed
Machine Setups 12:13:15 12,00,000 3,60,000 3,90,000 4,50,000
Setups
Total Activity Cost 7,04,940 8,85,060 10,10,000
Quantity Produces 10,000 20,000 30,000
Unit Cost (Overheads) 70.49 44.25 33.67
Add: Conversion Cost (Material + Labour) 80 80 90
Total 150.49 124.25 123.67
Q-6 Following are the data of three product lines of a departmental store for the year 2019-20:
Revenues ` 39,67,500 ` 1,05,03,000 ` 60,49,500
Items sold 1,26,000 11,04,000 3,06,000

Additional information related with the store are as follows:

Bottles returns Returning of empty bottles ` 60,000 Direct tracing to soft drink line
Delivery Physical delivery and
receipt of goods ` 12,60,000 3,150 deliveries
Shelf stocking Stocking of goods on store
shelves and on-going restocking ` 8,64,000 8,640 hours of shelf-stocking
time
Customer Assistance provided to
Support customers including check-out ` 15,36,000 15,36,000 items sold
Required:
Calculate the total cost and operating income using Activity Based Costing method.
Ans. Working notes:
(i) Total support cost:
(` )
Ordering 7,80,000
Delivery 12,60,000
(ii) Cost for each activity cost driver:
(1) (2) (3) (4) = [(2) ÷ (3)]
Statement of Total cost and Operating income
drinks (`) Produce (`) Food (`) (` )
Revenues: (A) 39,67,500 1,05,03,000 60,49,500 2,05,20,000
Cost & Goods sold 30,00,000 75,00,000 45,00,000 1,50,00,000
Ordering cost* (360:840:360) 1,80,000 4,20,000 1,80,000 7,80,000
Delivery cost* (300:2190:660) 1,20,000 8,76,000 2,64,000 12,60,000
Shelf stocking cost* (540:5400:2700) 54,000 5,40,000 2,70,000 8,64,000
(1,26,000:11,04,000:3,06,000) 1,26,000 11,04,000 3,06,000 15,36,000
Total cost: (B) 35,40,000 1,04,40,000 55,20,000 1,95,00,000
Operating income C:{(A)- (B)} 4,27,500 63,000 5,29,500 10,20,000
* Refer to working note (ii)

Q-7 PQR Ltd has decided to analyse the profitability of it’s five new customers. It buys soft drink bottles in
cases at ` 45 per case and sells them to retail customers at a list price of ? 54 per case. The data
pertaining to five customers are given below :
Particulars Customers
A B C D E
Number of Cases Sold 9360 14200 62000 38000 9800
List Selling Price ` 54 54 54 54 54
Actual Selling Price ` 54 53.40 49 50.20 48.60
Number of Purchase Orders %30 50 60 50 60
Number of Customers visits 4 6 12 4 6
Number of Deliveries 20 60 120 80 40
Kilometers travelled per delivery 40 12 10 20 60
Number ofexpediate Deliveries 0 0 0 0 2
It’s five activities and their cost drivers are :
Activity Cost Driver
Order taking ` 200 per purchase order
Customer visits ` 300 per each visit
Deliveries ` 4.00 per delivery km travelled
Product Handling ` 2.00 per case sold
Expedited deliveries ` 100 per each such delivery
(i) Compute the customer level operating income of each of five retail customers by using the Cost
Driver rates.
(ii) Examine the results to give your comments on Customer ‘D’ in comparison with Customer ‘C and
on Customer ‘E’ in comparison with Customer ‘A’.
Ans. Working note:
Computation of revenues (at listed price), discount, cost of goods sold and customer level operating
activities costs:
Particular Customers
A B C D E
Cases sold: (a) 9,360 14,200 62,000 38,000 9,800
Revenues (at listed price)
(‘): (b) {(a) × ` 54)} 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
Discount (`): (c) {(a) × - 8,520 3,10,000 1,44,400 52,920
Discount per case} (14,200 (62,000 (38,000 (9,800
cases × ` 0.6) cases × ` 5) cases × cases ×
` 3.80) ` 5.40)
Cost of goods sold (`): (d) {(a) × ` 45} 4,21,200 6,39,000 27,90,000 17,10,000 4,41000

Customer level operating activities costs

Order taking costs (`):
(No. of purchase × ` 200) 6,000 10,000 12,000 10,000 12,000
Customer visits costs (`)
(No. of customer visits × ` 300) 1,200 1,800 3,600 1,200 1,800
Delivery vehicles travel
costs (`) (Kms travelled by
delivery vehicles × ` 4 per km.) 3,200 2,880 4,800 6,400 9,600
Product handling costs (`) {(a) ×` 2} 18,720 28,400 1,24,000 76,000 19,600
Cost of expediting deliveries (`)
{No. of expedited deliveries × ` 100} - - - - 200
Total cost of customer level
operating activities (`) 29,120 43,080 1,44,400 93,600 43,200
(i) Computation of Customer level operating income
Particular Customers
A (`) B (`) C (`) D (`) E (`)
Revenues (At list price)
(Refer to working note) 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
Less: Discount
(Refer to working note) - 8,520 3,10,000 1,44,400 52,920
Revenue (At actual price) 5,05,440 7,58,280 30,38,000 19,07,600 4,76,280
Less: Cost of goods sold
(Refer to working note) 4,21,200 6,39,000 27,90,000 17,10,000 4,41000
Gross margin 84,240 1,19280 2,48,000 1,97,600 35,280
Less: Customer level operating
activities costs (Refer to working note) 29,120 43,080 1,44,400 93,600 43,200
Customer level operating income 55,120 76,200 1,03,600 1,04,000 (7,920)
(ii) Comments
Customer D in comparison with Customer C: Operating income of Customer D is more than of Customer
C, despite having only 61.29% (38,000 units) of the units volume sold in comparison to Customer C
(62,000 units). Customer C receives a higher percent of discount i.e. 9.26% (` 5) while Customer D
receive a discount of 7.04% (` 3.80). Though the gross margin of customer C (` 2,48,000) is more than
Customer D (‘ 1,97,600) but total cost of customer level operating activities of C (` 1,44,400) is more in
comparison to Customer D (` 93,600). As a result, operating income is more in case of Customer D.
Customer E in comparison with Customer A: Customer E is not profitable while Customer A is profitable.
Customer E receives a discount of 10% (`5.4) while Customer A doesn’t receive any discount. Sales
Volume of Customer A and E is almost same. However, total cost of customer level operating activities
of E is far more (` 43,200) in comparison to Customer A (` 29,120). This has resulted in occurrence of
loss in case of Customer E.

Q-8 MNO Ltd. manufactures two types of equipment A and B and absorbs overheads on the basis of direct
labour hours. The budgeted overheads and direct labour hours for the month of March 2019 are `
15,00,000 and 25,000 hours respectively. The information about the company’s products is as follows:
Equipment
A B
Budgeted Production Volume 3,200 units 3,850 units
Direct Material Cost ` 350 per unit ` 400 per unit
Direct Labour Cost
A: 3 hours @ ` 120 per hour ` 360
B: 4 hours @ ` 120 per hour ` 480
Overheads of ` 15,00,000 can be identified with the following three major activities:
Order Processing : ` 3,00,000
Machine Processing : ` 10,00,000
Product Inspection : ` 2,00,000
These activities are driven by the number of orders processed, machine hours worked and
inspection hours respectively. The data relevant to these activities is as follows:
Orders processed Machine hours worked Inspection hours
A 400 22,500 5,000
B 200 27,500 15,000
Total 600 50,000 20,000
Required :
(i) Prepare a statement showing the manufacturing cost per unit of each product usingthe absorption
costing method assuming the budgeted manufacturing volume isattained.
(ii) Determine cost driver rates and prepare a statement showing the manufacturing cost per unit of
each product using activity based costing, assuming the budgeted manufacturing volume is
attained.
(iii) MNO Ltd.’s selling prices are based heavily on cost. By using direct labour hours as an application
base, calculate the amount of cost distortion (under costed or over costed) for each equipment.
Ans.
(i) Overheads application base: Direct labour hours
Equipment Equipment
A (`) B (`)
Direct material cost 350 400
Direct labour cost 360 480
Overheads* 180 240
890 1120
Budgeted overheads `15,00,000
*Pre-determined rate = = = ` 60
Budgeted direct labour hours 25,000 hours

(ii) Estimation of Cost-Driver rate

Activity Overhead cost Cost-driver level Cost driver rate
(`) (`)
Order processing 3,00,000 600 Orders processed 500
Machine processing 10,00,000 50,000 Machine hours 20
Inspection 2,00,000 15,000 Inspection hours 10
Equipment Equipment
A (`) B (`)
Direct material cost 350 400
Direct labour cost 360 480
Prime Cost(A) 710 880
Overhead Cost
Order processing 400: 200 2,00,000 1,00,000
Machine processing 22,500: 27,500 4,50,000 5,50,000
Inspection 5,000: 15,000 50,000 1,50,000
Total overhead cost 7,00,000 8,00,000
(Overheads cost per unit for each overhead can also be calculated)
Per unit cost A (`) B (`)
7,00,000 /3,200 (B)-A 218.75
8,00,000/ 3,850 (B)-B 207.79
Unit manufacturing cost (A+B) 928.75 1,087.79
(iii) Calculation of Cost Distortion
Equipment Equipment
A (`) B (`)
Unit manufacturing cost–using direct labour
hours as an application base 890.00 1,120.00
Unit manufacturing cost-using activity based costing 928.75 1,087.79
Cost distortion -38.75 32.21
Q-9 M/s. HMB Limited is producing a product in 10 batches each of 15000 units in a year and incurring
following overheads their on:
Amount (`)
Material procurement 22,50,000
Maintenance 17,30,000
Set-up 6,84,500
Quality control 5,14,800
The prime costs for the year amounted to ` 3,01,39,000.
The company is using currently the method of absorbing overheads on the basis of prime cost. Now it
wants to shift to activity-based costing. Information relevant to Activity drivers for a year are as under:
Activity Driver Activity Volume
No. of purchase orders 1500
Maintenance hours 9080
No. of set-ups 2250
No. of inspections 2710

The company has produced a batch of 15000 units and has incurred ` 26,38,700 and ` 3,75,200 on
materials and wages respectively.
The usage of activities of the said batch are as follows:
Materials orders 48 orders
Maintenance hours 810 hours
No. of set-ups 40
(i) find out cost of product per unit on absorption costing basis for the said batch.
(ii) determine cost driver rate, total cost and cost per unit of output of the said batch on the basis of
activity based costing.
Ans. Working Note:
51,79,300
Overhead Absorption Rate = ×100 = 17.18%
3,01,39,000
(i) Cost of Product Under Absorption Costing

Item of Cost Amount (`)
Material 26,38,700
Wages 3,75,200
Prime Cost 30,13,900
51,79,300
Overheads: x 30,13,900 5,17,930
3,01,39,000

Units 15,000
Cost per unit 235.46
(ii) Cost driver rate, total cost and cost per unit on the basis of activity-based costing method Absorption
Costing
Calculation of Cost Driver rate:
Activity ` Activity Cost Driver
Volume Rate
Material Procurement 22,50,000 1500 1500
Maintenance 17,30,000 9080 190.53
Setup 6,84,500 2250 304.22
Quality Control 5,14,800 2710 189.96
Calculation of total Cost and cost per unit:
Item of Cost Amount (`)
Material 26,38,700
Wages 3,75,200
 22,50,000 
Material Purchase  x 48  72,000
 1,500 

 17,30,000 
Maintenance  x 810  1,54,328
 9,080 
 6,84,500 
Setup  2,250 x 40  12,169
 
 5,14,800 
Quality Control  x 25  4,749
 2,710 
Unit 15,000
Cost per unit 217.14

Q-10 Explain 'Activity Based Budgeting'.
Ans. Activity Based Budgeting (ABB)
• Activity based budgeting analyse the resource input or cost for each activity.
• It provides a framework for estimating the amount of resources required in accordance with the
budgeted level of activity.
• Actual results can be compared with budgeted results to highlight both in financial and non-
financial terms those activities with major discrepancies from budget for potential reduction in
supply of resources.
• It is a planning and control system which seeks to support the objectives of continuous
improvement.
• It means planning and controlling the expected activities of the organization to derive a cost-
effective budget that meet forecast workload and agreed strategic goals.
• ABB is the reversing of the ABC process to produce financial plans and budgets.
Q-11 PQR Pens Ltd. manufactures two products - ‘Gel Pen’ and ‘Ball Pen’. It furnishes the following data for
the year 2017:
Product Annual Output Total Machine Total number of Total number of
(Units) Hours Purchase orders set-ups
Gel Pen 5,500 24,000 240 30
Ball Pen 24,000 54,000 448 56
The annual overheads are as under:

Particulars `
Volume related activity costs 4,75,020
Set up related costs 5,79,988
Purchase related costs 5,04,992
Calculate the overhead cost per unit of each Product - Gel Pen and Ball Pen on the basis of: (i) Traditional
method of charging overheads (ii) Activity based costing method and (iii) Find out the difference in
cost per unit between both the methods.

Ans.
(i) Statement Showing Overhead Cost per unit “Traditional Method”
Gel Pen (`) Ball Pen (`)
Units 5,500 24,000
Overheads (`)
(Refer to W.N.) 4,80,000 10,80,000
(20 x 24,000 hrs.) (20 x 54,000 hrs.)
Overhead Rate per 87.27 45
unit (`) (` 4,80,000 / 5,500 units) (` 10,80,000 /24,000 units)
Working Notes:
Overhead Rate per Machine Hour
= Total Overhead incurred by the Company
Total Machine Hours
= 4,75,020+ 5,79,988+ 5,04,992
24,000 hours + 54,000 hours
15,60,000
=
78,000 hours
= ` 20 per machine hour
(ii) Statement Showing “Activity Based Overhead Cost”
Activity Cost Cost Driver Ratio Total Gel Pen Ball Pen
Pool Amount (` ) (` )
(` )
Volume Machine 24:54 4,75,020 1,46,160 3,28,860
Related hours
Activity Costs
Setup Related No. of Setups 30:56 5,79,988 2,02,321 3,77,667
Costs
Purchase No. of 240:448 5,04,992 1,76,160 3,28,832
Related Costs Purchase
Orders
Total Cost 5,24,641 10,35,359
Output (units) 5,500 24,000
Unit Cost (Overheads) 95.39 43.13
(iii)
Gel Pen Ball Pen
(`) (`)
Overheads Cost per unit (`) (Traditional Method) 87.27 45
Overheads Cost per unit (`) (ABC) 95.39 43.13
Difference per unit -8.12 +1.87
(Volume related activity cost, set up related costs and purchase related cost can also be calculated
under Activity Base Costing using Cost driver rate. However, there will be no changes in the final
answer.)

Q-12 Linex Limited manufactures three products P, Q and R which are similar in nature and are usually
produced in production runs of 100 units. Product P and R require both machine hours and assembly
hours, whereas product Q requires only machine hours. T he overheads incurred by the company
during the first quarter are as under:
`
Machine Department expenses…………………........................ 18,48,000
Assembly Department expenses…………………………………. 6,72,000
Setup costs…………………………………………………………. 90,000
Stores receiving cost………………………………………………. 1,20,000
Order processing and dispatch…………………………………… 1,80,000
Inspect and Quality control cost………………………………… 36,000
The date related to the three products during the period are as under:
P Q R
Units produced and sold 15,000 12,000 18,000
Machine hours worked 30,000 hrs. 48,000 hrs. 54,000 hrs.
Assembly hours worked (direct labour hours) 15,000 hrs. - 27,000 hrs.
Customers’ orders executed (in numbers) 1,250 1,000 1,500
Number of requisitions raised on the stores 40 30 50
Required
PREPARE a statement showing details of overhead costs allocated to each product type using activity based
costing.
Ans. Calculation of “Activity Rate”
Cost Pool Cost (Rs.) Cost Driver Cost Driver Rate
[A] [B] ( Rs.)
[C] = [A]÷[B]
Machine Department Expenses 18,48,000 Machine Hours (1,32,000 hrs.) 14.00
Assembly Department Expenses 6,72,000 Assembly Hours (42,000 hrs.) 16.00
Setup Cost 90,000 No. of Production Runs (450*) 200.00
Stores Receiving Cost 1,20,000 No. of Requisition s Raised on
the Stores (120) 1,000.00
Order Processing and Dispatch 1,80,000 No. of Customers Orders 48.00
Executed (3,750)
Inspectio n and Quality Control Cost 36,000 No. of Production Runs (450*) 80.00
Total (Rs.) 29,46,000
*Number of Production Run is 450 (150 + 120 + 180)
Statement Showing “Overheads Allocation”
Particulars of Cost Cost Driver P Q R Total
Machine Machine Hours 4,20,000 6,72,000 7,56,000 18,48,000
Department (30,000 × Rs.14) (48,000 × Rs.14) (54,000 × Rs.14)
Expenses
Assembly Assembly Hours 2,40,000 - -- 4,32,000 6,72,000
Department (15,000 × Rs.16) (27,000 × Rs.16)
Expenses
Setup Cost No. of 30,000 24,000 36,000 90,000
Production Runs (150 × Rs.200) (120 × Rs.200) (180 × Rs.200)


Stores No. of 40,000 30,000 50,000 1,20,000

Receiving Requisitions (40 × Rs.1,000) (30 × Rs.1,000) (50 × Rs.1,000)
Cost Raised on the
Stores
Order No. of 60,000 48,000 72,000 1,80,000
Processing Customers (1,250 × Rs.48) (1,000 × Rs.48) (1,500 × Rs.48)
and Dispatch Orders Executed
Inspection No. of 12,000 9,600 14,400 36,000
and Quality Production Runs (150 × Rs.80) (120 × Rs.80) (180 × Rs.80)
Control Cost
Overhead ( Rs.) 8,02,000 7,83,600 13,60,400 29,46,000
Q-13 Bank of Surat operated for years under the assumption that profitability can be increased by increasing
Rupee volume. But that has not been the case. Cost analysis has revealed the following:
Activity Activity Cost (`) Activity Driver Activity Capacity
Providing ATM Service 1,00,000 No. of Transactions 2,00,000
Computer Processing 10,00,000 No. of Transactions 25,00,000
Issuing Statements 8,00,000 No. of Statements 5,00,000
Customer Inquiries 3,60,000 Telephone Minutes 6,00,000
The following annual information on three products was also made available:
Activity Driver Checking Personal Loans Gold Visa
Accounts
Units of Product 30,000 5,000 10,000
ATM Transactions 1,80,000 0 20,000
Computer Transactions 20,00,000 2,00,000 3,00,000
Number of Statements 3,00,000 50,000 1,50,000
Telephone Minutes 3,50,000 90,000 1,60,000
Required
(i) CALCULATE rates for each activity.
(ii) Using the rates computed in requirement (i), Calculate the cost of each product.
Ans. (i) Statement Showing “Activity Rate”
Activity Activity Activity Driver No. of Units Activity
Cost [a] of Activity Rate
(` ) Driver [b] [a] / [b]
(` )
Providing ATM Service 1,00,000 No. of ATM Transactions 2,00,000 0.50
Computer Processing 10,00,000 No. of Computer Transactions 25,00,000 0.40
Issuing Statements 8,00,000 No. of Statements 5,00,000 1.60
Customer Inquiries 3,60,000 Telephone Minutes 6,00,000 0.60

(ii) Statement Showing “Cost of Product”

Activity Checking Accounts (`) Personal Loans (`) Gold Visa (`)
Providing ATM 90,000 --- 10,000
Service (1,80,000 tr.× ` 0.50) (20,000 tr. × ` 0.50)
Computer 8,00,000 80,000 1,20,000
Processing (20,00,000 tr. × ` 0.40) (2,00,000 tr. × ` 0.40) (3,00,000 tr. × ` 0.40)
Issuing 4,80,000 80,000 2,40,000
Statements (3,00,000 st. × ` 1.60) (50,000 st. × `1.60) (1,50,000 st. × ` 1.60)
Customer Inquiries 2,10,000 54,000 96,000
(3,50,000 min. × ` 0.60) (90,000 min. × ` 0.60) (1,60,000 min. × ` 0.60)
Total Cost [a] ` 15,80,000 ` 2,14,000 ` 4,66,000
Units of Product [b] 30,000 5,000 10,000
Cost of each 52.67 42.80 46.60
Product [a] / [b]
Q-14 Asian Mfg. Co. has decided to increase the size of the store. It wants the information about the probability
of the individual product lines : Lemon, Grapes and Papaya. It provides the following data for the 2018
for each product line:
Particulars Lemon Grapes Papaya
Revenues (Rs.) 79,350 2,10,060 1,20,990
Cost of goods sold (Rs.) 60,000 1,50,000 90,000
Cost of bottles returned (Rs.) 1,200 0 0
Number of deliveries received 30 219 66
Hours of shelf stocking time 54 540 270
Items sold 12,600 1,10,400 30,600
Asian Mfg. Co. also provides the following information for the year 2018:
Activity Description of Activity Total Costs (Rs.) Cost Allocation Basis
Bottle returns Returning of empty bottles to
the store 1,200 Direct tracing to product line
Ordering Placing of orders of purchases 15,600 156 purchase orders
Delivery Physical delivery and the receipts
of merchandise 25,200 315 deliveries
Self- stocking Stocking of merchandise on store
shelves and ongoing restocking 17,280 864 hours of time
Customer Assistance provided to customers
support including bagging and checkout 30,720 1,53,600 items sold
Required
(i) Asian Mfg. Co. currently allocates store support costs (all costs other than the cost of goods sold)
to the product line on the basis of the cost of goods sold of each product line. CALCULATE the
operating income and operating income as the percentage of revenue of each product line.

(ii) If Asian Mfg. Co. allocates store support costs (all costs other than the cost of goods sold) to the
product lines on the basis of ABC system, CALCULATE the operating income and operating income
as the percentage of revenue of each product line.
(iii) SHOW a comparison statement.
Ans.(a) (i) Absorption Costing System
Operating Income-
Particulars Lemon Grapes Papaya Total
Revenue 79,350 2,10,060 1,20,990 4,10,400
Less: Cost of Goods Sold 60,000 1,50,000 90,000 3,00,000
Less: Store Support Cost 18,000 45,000 27,000 90,000
Operating Income 1,350 15,060 3,990 20,400
Operating Income (%) 1.70 7.17 3.30 4.97
(ii) ABC System
Overhead Allocation Rate-
Activity Total Costs (Rs.) Quantity of Cost Overhead
Allocation Base Allocation Rate (Rs.)
Ordering 15,600 156 Purchase Orders 100.00
Delivery 25,200 315 Delivering Orders 80.00
Shelf Stocking 17,280 864 Self Stocking Hours 20.00
Customer Support 30,720 1,53,600 Items Sold 0.20
Store Support Cost-
Particulars Cost Driver Lemon Grapes Papaya Total
Bottle Returns Direct 1,200 0 0 1,200
Ordering Purchase Orders 3,600 8,400 3,600 15,600
Delivery Deliveries 2,400 17,520 5,280 25,200
Self -Stocking Hours of time 1,080 10,800 5,400 17,280
Customer Support Items Sold 2,520 22,080 6,120 30,720
Grand Total 10,800 58,800 20,400 90,000
Operating Income-
Revenue 79,350 2,10,060 1,20,990 410,400
Less: Cost of Goods Sold 60,000 1,50,000 90,000 300,000
Less: Store Support Cost 10,800 58,800 20,400 90,000
Operating Income 8,550 1,260 10,590 20,400
Operating Income (%) 10.78 0.60 8.75 4.97
(iii) Comparison
Under Traditional Costing System 1.70% 7.17% 3.30% 4.97%
Under ABC System 10.78% 0.60% 8.75% 4.97%

Q-15 Woolmark Ltd. manufactures three types of products namely P, Q and R. The data relating to a period
are as under:
Particulars P Q R
Machine hours per unit 10 18 14
Direct Labour hours per unit @ Rs. 20 4 12 8
Direct Material per unit (Rs.) 90 80 120
Production (units) 3,000 5,000 20,000
Currently the company uses traditional costing method and absorbs all production overheads on the
basis of machine hours. The machine hour rate of overheads is Rs. 6 per hour.
The company proposes to use activity based costing system and the activity analysis is as under:
Particulars P Q R
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3
The total production overheads are analysed as under:
Machine set up costs 20%
Machine operation costs 30%
Inspection costs 40%
Material procurement related costs 10%
Required:
(i) Calculate the cost per unit of each product using traditional method of absorbing all production
overheads on the basis of machine hours.
(ii) Calculate the cost per unit of each product using activity based costing principles.
Ans.
(i) Statement Showing “Cost per unit - Traditional Method”
Particulars of Costs P Q R
(`) (`) (`)
Direct Materials 90 80 120
Direct Labour [(4, 12, 8 hours)x ` 20] 80 240 160
Production Overheads [(10, 18, 14 hours) x ` 6] 60 108 84
Cost per unit 230 428 364
(ii) Statement Showing “Cost per unit - Activity Based Costing”
Products P Q R
(`) (`) (`)
Direct Materials (90, 80, 120) 2,70,000 4,00,000 24,00,000
Direct Labour (80, 240, 160) 2,40,000 12,00,000 32,00,000
Machine Related Costs @ ` 1.80 per hour
(30,000, 90,000, 2,80,000) 54,000 1,62,000 5,04,000
Setup Costs @ ` 9,600 per setup (20, 10, 20) 1,92,000 96,000 1,92,000
Inspection Costs @ ` 4,800 per inspection (100, 40, 60) 4,80,000 1,92,000 2,88,000
Purchase Related Costs @ ` 750 per purchase (60, 100, 160) 45,000 75,000 1,20,000
Total Costs 12,81,000 21,25,000 67,04,000
Cost per unit(Total Cost  Units) 427.00 425.00 335.20

Workings
Number of Batches, Purchase Orders, and Inspections-
Particulars P Q R Total
A. Production (units) 3,000 5,000 20,000
B. Batch Size (units) 150 500 1,000
C. Number of Batches [A  B] 20 10 20 50
D. Number of Purchase Order per batch 3 10 8
E. Total Purchase Orders [C x D] 60 100 160 320
F. Number of Inspections per batch 5 4 3
G. Total Inspections [C x F] 100 40 60 200
Total Machine Hours-
Particulars P Q R
A. Machine Hours per unit 10 18 14
B. Production (units) 3,000 5,000 20,000
C. Total Machine Hours [A x B] 30,000 90,000 2,80,000
Total Machine Hours = 4,00,000
Total Production Overheads -
= 4,00,000 hrs. x Rs. 6 = ` 24,00,000
Cost Driver Rates -
Cost Pool % Overheads Cost Driver Cost Driver Rate
(`) (Units) (`)
Setup 20% 4,80,000 50 9,600 per Setup
Inspection 40% 9,60,000 200 4,800 per Inspection
Purchases 10% 2,40,000 320 750 per Purchase
Machine Hours 30% 7,20,000 4,00,000 1.80 per Machine Hour
Q-16 Discuss the requirements of implementing Activity Based Costing.
Ans. A number of distinct practical stages are required in the ABC implementation which are given as
below:
(1) Staff Training: The co-operation of the workforce is critical to the successful implementation of
ABC. Staff training should be done to create an awareness of the purpose of ABC.
(2) Process Specification: Informal, but structured, interviews with key members of personnel will
identify the different stages of the production process, the commitment of resources to each,
processing times and bottlenecks.
(3) Activity Definition: Early activity should be clearly defined the problem must be kept manageable
at this stage, despite the possibility of information overload from new data, much of which is in
need of codification.
(4) Activity Driver Selection: Cost driver for each activity shall be selected.
(5) Assigning Cost: A single representative activity driver can be used to assign costs from the activity
pools to the cost objects.
Q-17 BABYSOFT is a global brand created by Bio-organic Ltd. The company manufactures three range of
beauty soaps i.e. BABYSOFT- Gold, BABYSOFT- Pearl, and BABYSOFT- Diamond.
The budgeted costs and production for the month of December, 2019 are as follows:

BABYSOFT- Gold BABYSOFT- Pearl BABYSOFT- Diamond

Production of
soaps (Units) 4,000 3,000 2,000
Resources per Qty Rate Qty Rate Qty Rate
Unit:
- Essential O ils 60 ml ` 200 / 100 ml 55 ml ` 300 / 100 ml 65 ml ` 300 / 100 ml
- Cocoa Butter 20 g ` 200 / 100 g 20 g ` 200 / 100 g 20 g ` 200 / 100 g
- Filtered Water 30 ml ` 15 / 100 ml 30 ml ` 15 / 100 ml 30 ml ` 15 / 100 ml
- Chemicals 10 g ` 30 / 100 g 12 g ` 50 / 100 g 15 g ` 60 / 100 g
- Direct Labour 30 ` 10 / hour 40 ` 10 / hour 60 ` 10 / hour
minutes minutes minutes
Bio-organic Ltd. followed an Absorption Costing System and absorbed its production overheads, to
its products using direct labour hour rate, which were budgeted at ` 1,98,000.
Now, Bio-organic Ltd. is considering adopting an Activity Based Costing system. For this, additional
information regarding budgeted overheads and their cost drivers is provided below:
Particulars (` ) Cost drivers
Forklifting cost 58,000 Weight of material lifted
Supervising cost 60,000 Direct labour hours
Utilities 80,000 Number of Machine operations
The number of machine operators per unit of production are 5, 5, and 6 for BABYSOFT - Gold, BABYSOFT-
Pearl, and BABYSOFT- Diamond respectively.
(Consider (i) Mass of 1 litre of Essential Oils and Filtered Water equivalent to 0.8 kg and 1 kg respectively
(ii) Mass of output produced is equivalent to the mass of input materials taken together.)
You are requested to:
(i) PREPARE a statement showing the unit costs and total costs of each product using the absorption
costing method.
(ii) PREPARE a statement showing the product costs of each product using the ABC approach.
(iii) STATE what are the reasons for the different product costs under the two approaches?
Ans. (i) Traditional Absorption Costing
BABYSOFT BABYSOFT BABYSOFT Total
- Gold Pearl Diamond
(a) Production of soaps (Units) 4,000 3,000 2,000 9,000
(b) Direct labour (minutes) 30 40 60 -
(c) Direct labour hours 2,000 2,000 2,000 6,000
(a × b)/60 minutes
Overhead rate per direct labour hour:
= Budgeted overheads  Budgeted labour hours
= ` 1,98,000 / 6,000 hours
= ` 33 per direct labour hour

Unit Costs:
(`) (`) (`)
Direct Costs:
- Direct Labour 5.00 6.67 10.00
 10 x 30   10 x 40   10 x 60 
     
 60   60   60 
-
Direct Material 167.50 215.50 248.50
(Refer working note1)
Production Overhead: 16.50 22.00 33.00
 33 x 30   33 x 40   33 x 30 
     
 60   60   60 
60 60 60
Total unit costs 189.00 244.17 291.50
Number of units 4,000 3,000 2,000
Total costs 7,56,000 7,32,510 5,83,000
Working note-1
Calculation of Direct material cost
(`) (`) (`)
Essential oils 120.00 165.00 195.00
 200 x 60   300 x 55   300 x 65 
     
 100   100   100 
Cocoa Butter 40.00 40.00 40.00
 200 x 20   200 x 20   200 x 20 
     
 100   100   100 
Filtered water 4.50 4.50 4.50
 15 x 30   15 x 30   15 x 30 
     
 100   100   100 
Chemicals 3.00 6.00 9.00
 30 x 10   50 x 12   60 x 15 
     
 100   100   100 
Total costs 167.50 215.50 248.50

(ii) Activity Based Costing

BABYSOFT- Gold BABYSOFT- Pearl BABYSOFTDiamond Total
Quantity (units) 4,000 3,000 2,000 -
Weight per unit (grams) 108 106 117 -
(60 × 0.8) + 20 + 30 + 10 55 × 0.8) + 20 + 30 + 12 65 × 0.8) + 20 + 30 + 15

4, 32, 000 3, 18, 000 2, 34, 000
Total weight (grams) 9,84,000

Direct labour (minutes) 30 40 60 -
Direct labour hours 2,000 2,000 2,000 6,000
 4, 000 x 30   3, 000 x 40   2, 000 x 60 

      `
 60   60   60 
Machine operations per unit 5 5 6 -
Total operations 20,000 15,000 12,000 47,000
Forklifting rate per gram = ` 58,000 „i 9,84,000 grams
= ` 0.06 per gram
Supervising rate per direct labour hour = ` 60,000  6,000 hours = ` 10 per labour hour
Utilities rate per machine operations = ` 80,000  47,000 machine operations
= ` 1.70 per machine operations
Unit Costs under ABC:
BABYSOFT- Gold BABYSOFTPearl BABYSOFTDiamond
(`) (`) (`)
Direct Costs:
- Direct Labour 5.00 6.67 10.00
- Direct material 167.50 215.50 248.50
Production Overheads:
Forklifting cost 6.48 6.36 7.02
(0.06 x 108) (0.06 x 106) (0.06 x 117)
Supervising cost 5.00 6.67 10.00
 10 x 30   10 x 40   10 x 60 
     
 60   60   60 
Utilities 8.50 8.50 10.20

(1.70 x 5) (1.70 x 5) (1.70 x 6)
Total unit costs 192.48 243.70 285.72
Number of units 4,000 3,000 2,000
Total costs 7,69,920 7,31,100 5,71,440
(iii) Comments: The difference in the total costs under the two systems is due to the differences in
the overheads borne by each of the products. The Activity Based Costs appear to be more precise.

Q-18 KD Ltd. is following Activity based costing. Budgeted overheads, cost drivers and volume are as follows:
Cost pool Budgeted Cost driver Budgeted
overheads (`) volume
Material procurement 18,42,000 No. or orders 1,200
Material handling 8,50,000 No. of movement 1,240
Maintenance 24,56,000 Maintenance hours 17,550
Set-up 9,12,000 No. of set-ups 1,450
Quality control 4,42,000 No. of inspection 1,820
The company has produced a batch of 7,600 units, its material cost was `24,62,000 and wages ` 4,68,500.
Usage activities of the said batch are as follows:
Material orders 56
Material movements 84
Maintenance hours 1,420 hours
Set-ups 60
Required:
(i) CALCULATE cost driver rates.
(ii) CALCULATE the total and unit cost for the batch.
Ans.(i) Calculation of cost driver rate:
Cost pool Budgeted Cost driver Cost driver rate
overheads (`) (` )
Material procurement 18,42,000 1,200 1,535.00
Material handling 8,50,000 1,240 685.48
Maintenance 24,56,000 17,550 139.94
Set-up 9,12,000 1,450 628.97
Quality control 4,42,000 1,820 242.86
(ii) Calculation of cost for the batch:
Particulars Amount (`) Amount (`)
Material cost 24,62,000.00
Wages 4,68,500.00
Overheads:
- Material procurement ( `1,535×56 orders) 85,960.00
- Material handling (`685.48×84 movements) 57,580.32
- Maintenance (`139.94×1,420 hours) 1,98,714.80
- Set-up (` 628.97×60 set-ups) 37,738.20
- Quality control (` 242.86×18 inspections) 4,371.48 3,84,364.80
Total Cost 33,14,864.80
No. of units 7,600
Cost per units 436.17

Q-19 The following budgeted information relates to B Ltd. for the year 2021:
Products
X Y Z
Production and Sales (units) 1,00,000 80,000 60,000
(`) (`) (`)
Selling price per unit 45 90 70
Direct cost per unit 25 45 50
Hours Hours Hours
Machine department
(machine hours per unit) 3 4 5
Assembly department
(direct labour hours per unit) 6 4 3
The estimated overhead expenses for the year 2021 will be as below:
Machine Department ` 36,80,000
Assembly Department ` 27,50,000
Overhead expenses are apportioned to the products on the following basis:
Machine Department On the basis of machine hours
Assembly Department On the basis of labour hours
After a detailed study of the activities the following cost pools and their respective cost drivers are
found:
Cost Pool Amount (`) Cost Driver Quantity
Machining services 32,20,000 Machine hours 9,20,000 hours
Assembly services 22,00,000 Direct labour hours 11,00,000 hours
Set-up costs 4,50,000 Machine set-ups 9,000 set-ups
Order processing 3,60,000 Customer orders 7,200 orders
Purchasing 2,00,000 Purchase orders 800 orders
As per an estimate the activities will be used by the three products:
Products
X Y Z
Machine set-ups 4,500 3,000 1,500
Customer orders 2,200 2,400 2,600
Purchase orders 300 350 150
You are required to PREPARE a product-wise profit statement using:
(i) Absorption costing method;
(ii) Activity-based method.
Ans. (i) Profit Statement using Absorption costing method:
Particulars Product Total
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000 2,40,000
B. Selling price per unit (`) 45 90 70
C. Sales Value (`) [A×B] 45,00,000 72,00,000 42,00,000 1,59,00,000
D. Direct cost per unit (`) 25 45 50

E. Direct Cost (`) [A×D] 25,00,000 36,00,000 30,00,000 91,00,000

F. Overheads:
(i) Machine department (`) 12,00,000 12,80,000 12,00,000 36,80,000
(Working note-1)
(ii) Assembly department (`) 15,00,000 8,00,000 4,50,000 27,50,000
(Working note-1)
G. Total Cost (`) [E+F] 52,00,000 56,80,000 46,50,000 1,55,30,000

H. Profit (C-G) (7,00,000) 15,20,000 (4,50,000) 3,70,000
(ii) Profit Statement using Activity based costing (ABC) method:
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000
C. Sales Value (`) [A×B] 45,00,000 72,00,000 42,00,000 1,59,00,000
E. Direct Cost (`) [A×D] 25,00,000 36,00,000 30,00,000 91,00,000
F. Overheads: (Refer
working note-3)
(i) Machining services (`) 10,50,000 11,20,000 10,50,000 32,20,000
(ii) Assembly services (`) 12,00,000 6,40,000 3,60,000 22,00,000
(iii) Set-up costs (`) 2,25,000 1,50,000 75,000 4,50,000
(iv) Order processing (`) 1,10,000 1,20,000 1,30,000 3,60,000
(v) Purchasing (`) 75,000 87,500 37,500 2,00,000
G. Total Cost (`) [E+F] 51,60,000 57,17,500 46,52,500 1,55,30,000
H. Profit (`) (C-G) (6,60,000) 14,82,500 (4,52,500) 3,70,000
Working Notes:
(1) Products
X Y Z Total
A. Production (units) 1,00,000 80,000 60,000
B. Machine hours per unit 3 4 5
C. Total Machine hours [A×B] 3,00,000 3,20,000 3,00,000 9,20,000
D. Rate per hour (`) 4 4 4
E. Machine Dept. cost [C×D] 12,00,000 12,80,000 12,00,000 36,80,000
F. Labour hours per unit 6 4 3
G. Total labour hours [A×F] 6,00,000 3,20,000 1,80,000 11,00,000
H. Rate per hour (`) 2.5 2.5 2.5
I Assembly Dept. cost [G×H] 15,00,000 8,00,000 4,50,000 27,50,000
Machine hour rate = =`4

Labour hour rate = = ` 2.5

2. Calculation of cost driver rate
Cost Pool Amount (`) Cost Driver Quantity Driver
rate (`)
Machining services 32,20,000 Machine hours 9,20,000 hours 3.50
Assembly services 22,00,000 Direct labour 11,00,000 2.00
hours hours
Set-up costs 4,50,000 Machine set-ups 9,000 set-ups 50.00
Order processing 3,60,000 Customer 7,200 orders 50.00
orders
Purchasing 2,00,000 Purchase 800 orders 250.00
orders
3. Calculation of activity-wise cost
Products
X Y Z Total
A. Machining hours (Refer Working note-1) 3,00,000 3,20,000 3,00,000 9,20,000
B. Machine hour rate (`) (Refer
Working note-2) 3.5 3.5 3.5
C. Machining services cost (`)
[A×B] 10,50,000 11,20,000 10,50,000 32,20,000
D. Labour hours (Refer Working
note-1) 6,00,000 3,20,000 1,80,000 11,00,000
E. Labour hour rate (`) (Refer 2 2 2
Working note-2)
F. Assembly services cost (`) [D×E] 12,00,000 6,40,000 3,60,000 22,00,000
G. Machine set-ups 4,500 3,000 1,500 9,000
H. Rate per set-up (`) (Refer 50 50 50
Working note-2)
I. Set-up cost (`) [G×H] 2,25,000 1,50,000 75,000 4,50,000
J. Customer orders 2,200 2,400 2,600 7,200
K. Rate per order (`) (Refer 50 50 50
Working note-2)
L. Order processing cost (`) [J×K] 1,10,000 1,20,000 1,30,000 3,60,000
M. Purchase orders 300 350 150 800
N. Rate per order (`) (Refer 250 250 250
Working note-2)
O. Purchasing cost (`) [M×N] 75,000 87,500 37,500 2,00,000
Q-20 Breezle Ltd has decided to analyse the profitability of its five new customers. It buys soft drink bottles
in cases at ` 54 per case and sells them to retail customers at a list price of ` 64.80 per case. The data
pertaining to five customers are given below:

Aey Bee Cee Dee Eey
Number of Cases Sold 9,360 14,200 62,000 38,000 9,800
List Selling Price (`) 64.80 64.80 64.80 64.80 64.80
Actual Selling Price (`) 64.80 64.08 58.80 60.24 58.32
Number of Purchase Orders 30 50 60 50 60
Number of Customers visits 4 6 12 4 6
Number of Deliveries 20 60 120 80 40
Kilometers travelled per delivery 40 12 10 20 60
Number of expediate Deliveries 0 0 0 0 2
Its five activities and their cost drivers are:
Activity Cost Driver
Order taking ` 240 per purchase order
Customer visits ` 360 per each visit
Deliveries ` 4.80 per delivery km travelled
Product Handling ` 2.40 per case sold
Expedited deliveries ` 120 per such delivery
You are REQUIRED to :
(i) Compute the customer level operating income of each of five retail customers by using the Cost
Driver rates.
(ii) Examine the results to give your comments on Customer ‘Dee’ in comparison with Customer ‘Cee’
and on Customer ‘Eey’ in comparison with Customer ‘Aey’.
Ans. Working note:
Computation of revenues (at listed price), discount, cost of goods sold and customer level operating
activities costs:
Aey Bee Cee Dee Eey
Cases sold: (a) 9,360 14,200 62,000 38,000 9,800
Revenues (at listed price) 6,06,528 9,20,160 40,17,600 24,62,400 6,35,040
(`): (b) {(a) x ` 64.80)}
Discount (`): (c) {(a) x - 10,224 3,72,000 1,73,280 63,504
Discount per case} (14,200 cases x (62,000 cases x(38,000 cases x(9,800 cases x
` 0.72) ` 6) ` 4.56) ` 6.48)
Cost of goods sold (`): (d) 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
{(a) x ` 54}
Customer level operating activities costs
Order taking costs (`): 7,200 12,000 14,400 12,000 14,400
(No. of purchase x ` 240)
Customer visits costs 1,440 2,160 4,320 1,440 2,160
(`) (No. of customer visits
x ` 360)
Delivery vehicles travel 3,840 3,456 5,760 7,680 11,520

costs (`) (Kms travelled

by delivery vehicles x `
4.80 per km.)
Product handling costs (`) 22,464 34,080 1,48,800 91,200 23,520
{(a) x ` 2.40}
Cost of expediting - - - - 240
deliveries (`)
{No. of expedited
deliveries x ` 120}
Total cost of customer 34,944 51,696 1,73,280 1,12,320 51,840
level operating activities (`)
(i) Computation of Customer level operating income
Aey (`) Bee (`) Cee (`) Dee (`) Eey (`)
Revenues 6,06,528 9,20,160 40,17,600 24,62,400 6,35,040
(At list price)
(Refer to working note)
Less: Discount - 10,224 3,72,000 1,73,280 63,504
Revenue 6,06,528 9,09,936 36,45,600 22,89,120 5,71,536
(At actual price)
Less: Cost of goods sold 5,05,440 7,66,800 33,48,000 20,52,000 5,29,200
Gross margin 1,01,088 1,43,136 2,97,600 2,37,120 42,336
Less: Customer level
operating activities costs 34,944 51,696 1,73,280 1,12,320 51,840
Customer level operating income 66,144 91,440 1,24,320 1,24,800 (9,504)
(ii) Comments
Customer Dee in comparison with Customer Cee: Operating income of Customer Dee is more than that
of Customer Cee, despite having only 61.29% (38,000 units) of the units volume sold in comparison to
Customer Cee (62,000 units). Customer Cee receives a higher percent of discount i.e. 9.26% (` 6) while
Customer Dee receive a discount of 7.04% (` 4.56).
Though the gross margin of customer Cee (` 2,97,600) is more than that of Customer Dee (` 2,37,120)
but total cost of customer level operating activities of Cee ( ` 1,73,280 ) is more in comparison to
Customer Dee (` 1,12,320). As a result, operating income is more in case of Customer Dee.
Customer Eey in comparison with Customer Aey: Customer Eey is not profitable while Customer Aey is
profitable. Customer Eey receives a discount of 10% (` 6.48) while Customer Aey doesn’t receive any
discount. Sales Volume of Customer Aey and Eey is almost same.
However, total cost of customer level operating activities of Eey is far more (` 51,840) in comparison to
Customer Aey (` 34,944). This has resulted in occurrence of loss in case of Customer Eey.

Q-21 SNS Trading Company has three Main Departments and two Service Departments. The data for each
department is given below:
Departments Expenses Area in (Sq. Mtr) Number of
Main Department: (in `) Employees
Purchase Department 5,00,000 12 800
Packing Department 8,00,000 15 1700
Distribution Department 3,50,000 7 700
Service Departments:
Maintenance Department 6,40,000 4 200
Personnel Department 3,20,000 6 250
The cost of Maintenance Department and Personnel Department is distributed on the basis of ‘Area in
Square Metres’ and ‘Number of Employees’ respectively.
(i) Prepare a Statement showing the distribution of expenses of Service Departments to the Main
Departments using the “Step Ladder method” of Overhead Distribution.
(ii) Compute the Rate per hour of each Main Department, given that, the Purchase Department,
Packing Department and Distribution Department works for 12 hours a day, 24 hours a day and 8
hours a day respectively. Assume that there are 365 days in a year and there are no holidays.
Ans. (i) Schedule Showing the Distribution of Expenses of Service Departments using Step ladder method.
Main Department Service Department
Purchase Packing Distribution Maintenance Personnel
(`) (`) (`) (`) (`)
Expenses 5,00,000 8,00,000 3,50,000 6,40,000 3,20,000
Distribution of
Maintenance
Department
(12:15:7:-:6) 1,92,000 2,40,000 1,12,000 (6,40,000) 96,000
Distribution of
Personnel
Department
(800:1700:700:-:-) 1,04,000 2,21,000 91,000 - (4,16,000)
Total 7,96,000 12,61,000 5,53,000 - -
(ii) Calculation of Expenses rate per hour of Main Department
Purchase Packing Distribution
Total apportioned expenses ( `) 7,96,000 12,61,000 5,53,000
Total Hours worked 4,380 8,760 2,920
(12 x 365) (24 x 365) (8 x 365)
Expenses rate per hour (`) 181.74 143.95 189.38
Q-22 PQR Ltd. is engaged in the production of three products P, Q and R. The company calculates Activity Cost
Rates on the basis of Cost Driver capacity which is provided as below:

Activity Cost Driver Cost Driver Capacity Cost (`)

Direct Labour hours Labour hours 30,000 Labour hours 3,00,000
Production runs No. of Production runs 600 Production runs 1,80,000
Quality Inspections No. of Inspection 8000 Inspections 2,40,000
The consumption of activities during the period is as under:
Activity / Products P Q R
Direct Labour hours 10,000 8,000 6,000
Production runs 200 180 160
Quality Inspection 3,000 2,500 1,500
(i) Compute the costs allocated to each Product from each Activity.
(ii) Calculate the cost of unused capacity for each Activity.
(iii) A potential customer has approached the company for supply of 12,000 units of a new product. ‘S’
to be delivered in lots of 1500 units per quarter. This will involve an initial design cost of ` 30,000
and per quarter production will involve the following:
Direct Material ` 18,000
Direct Labour hours 1,500 hours
No. of Production runs 15
No. of Quality Inspection 250
Prepare cost sheet segregating Direct and Indirect costs and compute the Sales value per quarter of
product ‘S’ using ABC system considering a markup of 20% on cost.
Ans. (i) Statement of cost allocation to each product from each activity
Product
P (`) Q (`) R (`) Total (`)
Direct Labour 1,00,000 80,000 60,000 2,40,000
hours (Refer to (10,000 Labour (8,000 Labour (6,000 Labour
working note) hours × `10) hours × `10) hours × `10)
Production 60,000 54,000 48,000 1,62,000
runs (Refer to (200 Production (180 Production (160 Production
working note) runs × ` 300) runs × ` 300) runs × ` 300)
Quality 90,000 75,000 45,000 2,10,000
Inspections (3,000 (2,500 (1,500
(Refer to Inspections × Inspections × Inspections ×
working note) ` 30) ` 30) ` 30)
Working note:
Rate per unit of cost driver
Direct Labour hours (` 3,00,000/30,000 Labour ` 10 per Labour hour
hours)
Production runs (` 1,80,000/600 Production ` 300 per Production run
runs)
Quality Inspection (` 2,40,000/8,000 Inspections) ` 30 per Inspection

(ii) Computation of cost of unused capacity for each activity

Particulars (` )
Direct Labour hours [(` 3,00,000 – ` 2,40,000) or (6,000 x ` 10)] 60,000
Production runs [(` 1,80,000 – ` 1,62,000) or (60 x ` 300)] 18,000
Quality Inspection [(` 2,40,000 – ` 2,10,000) or (1,000 x ` 30)] 30,000
Total cost of unused capacity 1,08,000
(iii) Cost sheet and Computation of Sales value per quarter of product ‘S’ using ABC system
Particulars (`)
1500 units of product ‘S’ to be delivered per quarter
Initial design cost per quarter (` 30,000 / 8 quarters) 3,750
Direct Material Cost 18,000
Direct Labour Cost (1,500 Labour hours x ` 10) 15,000
Direct Costs (A) 36,750
Set up Cost (15 Production runs × ` 300) 4,500
Inspection Cost (250 Inspections × ` 30) 7,500
Indirect Costs (B) 12,000
Total Cost (A + B) 48,750
Add: Mark-up (20% on cost) 9,750
Sale Value 58,500
Selling Price per unit ‘S’ (` 58,500/1500 units) 39
Q-23 ABC Ltd. manufactures three products X, Y and Z using the same plant and resources. It has given the
following information for the year ended on 31st March, 2020:
X Y Z
Production Quantity (units)
Cost per unit: 1200 1440 1968
Direct Material (`) 90 18 84
Direct Labour (`) 20 176 30
Budgeted direct labour rate was ` 4 per hour and the production overheads, shown in table below,
were absorbed to products using direct labour hour rate. Company followed Absorption Costing Method.
However, the company is now considering adopting Activity Based Costing Method.
Budgeted Cost Driver Remarks
Overheads (`)
Material 50,000 No. of orders No. of orders was 25
Procurement units for each product.
Set-up 40,000 No. of production All the three products
Runs are produced in
production runs of 48 units.
Quality Control 28,240 No. of Inspections Done for each
production run.
Maintenance 1,28,000 Maintenance hours Total maintenance
hours were 6,400 and
was allocated in the
ratio of 1:1:2 between
X, Y & Z.

Required:
1. Calculate the total cost per unit of each product using the Absorption Costing Method.
2. Calculate the total cost per unit of each product using the Activity Based Costing Method.
Ans. 1. Traditional Absorption Costing
X Y Z Total
(a) Quantity (units) 1,200 1,440 1,968 4608
(b) Direct labour per unit (`) 18 20 30 -
(c) Direct labour hours (a × b)/` 4 5,400 7,200 14,760 27,360
Overhead rate per direct labour hour:
= Budgeted overheads „iBudgeted labour hours
= (` 50,000 + ` 40,000 + ` 28,240 + ` 1,28,000) „i 27,360 hours
= ` 2,46,240  27,360 hours
= ` 9 per direct labour hour
Unit Costs:
X Y Z
Direct Costs:
- Direct Labour (`) 18.00 20.00 30.00
- Direct Material (`) 90.00 84.00 176.00
Production Overhead: (`) 40.50 45.00 67.50
 9  18   9  20   9  30 
     
 4   4   4 
Total cost per unit (`) 148.50 149.00 273.50
2. Calculation of Cost-Driver level under Activity Based Costing
X Y Z Total
Quantity (units) 1,200 1,440 1,968 -
No. of orders (to be 48 58 79 185
rounded off for fraction) (1200 / 25) (1440 / 25) (1968 / 25)
No. of production runs 25 30 41 96
(1200 / 48) (1440 / 48) (1968 / 48)
No. of Inspections
(done for each 25 30 41 96
production run)
Maintenance hours 1,600 1,600 3,200 6400
Calculation of Cost-Driver rate
Activity Budgeted Cost-driver Cost Driver rate
Cost (`) level (`)
(a) (b) (c) = (a) / (b)
Material procurement 50,000 185 270.27
Set-up 40,000 96 416.67
Quality control 28,240 96 294.17
Maintenance 1,28,000 6,400 20.00

Calculation of total cost of products using Activity Based Costing

Particulars Product
X (`) Y (`) Z (`)
Direct Labour 18.00 20.00 30.00
Direct Material 90.00 84.00 176.00
Prime Cost per unit (A) 108.00 104.00 206.00
Material procurement 10.81 10.89 10.85
[(48 x 270.27)/1200] [(58 x 270.27)/1440] [(79 x 270.27)/1968]
Set-up 8.68 8.68 8.68
[(25 x 416.67)/1200] [(30 x 416.67)/ 1440] [(41 x 416.67)/ 1968]
Quality control 6.13 6.13 6.13
[(25 x 294.17)/1200] [(30 x 294.17)/ 1440] [(41 x 294.17)/ 1968]
Maintenance 26.67 22.22 32.52
[(1,600 x 20)/1200] [(1,600 x 20)/ 1440] [(3,200 x 20)/ 1968]
Overhead Cost per unit (B) 52.29 47.92 58.18
Total Cost per unit (A + B) 160.29 151.92 264.18
Note: Question may also be solved assuming no. of orders for material procurement to be 25 for each
product.
Q-24 ABC Ltd. is engaged in production of three types of Fruit Juices:
Apple, Orange and Mixed Fruit.
The following cost data for the month of March 2020 are as under:
Particulars Apple Orange Mixed Fruit
Units produced and sold 10,000 15,000 20,000
Material per unit (`) 8 6 5
Direct Labour per unit (`) 5 4 3
No. of Purchase Orders 34 32 14
No. of Deliveries 110 64 52
Shelf Stocking Hours 110 160 170
Overheads incurred by the company during the month are as under :
(` )
Ordering costs 64,000
Delivery costs 1,58,200
Shelf Stocking costs 87,560
Required:
(i) Calculate cost driver’s rate.
(ii) Calculate total cost of each product using Activity Based Costing.
Ans.(i) Calculation Cost-Driver’s rate
Activity Overhead cost Cost-driver level Cost driver rate
(` ) (` )
(A) (B) (C) = (A)/(B)
Ordering 64,000 34 + 32 + 14 800
= 80 no. of purchase orders

Delivery 1,58,200 110 + 64 + 52 700

= 226 no. of deliveries
Shelf stocking 87,560 110 + 160 + 170 199
= 440 shelf stocking hours
(ii) Calculation of total cost of products using Activity Based Costing
Particulars Fruit Juices
Apple (`) Orange (`) Mixed Fruit (`)
Material cost 80,000 90,000 1,00,000
(10,000 x ` 8) (15,000 x ` 6) (20,000 x ` 5)
Direct labour cost 50,000 60,000 60,000
(10,000 x ` 5) (15,000 x ` 4) (20,000 x ` 3)
Prime Cost (A) 1,30,000 1,50,000 1,60,000
Ordering cost 27,200 25,600 11,200
(800 x 34) (800 x 32) (800 x 14)
Delivery cost 77,000 44,800 36,400
(700 x 110) (700 x 64) (700 x 52)
Shelf stocking cost 21,890 31,840 33,830
(199 x 110) (199 x 160) (199 x 170)
Overhead Cost (B) 1,26,090 1,02,240 81,430
Total Cost (A + B) 2,56,090 2,52,240 2,41,430
Q-25 Describe the various levels of activities under ‘ABC’ methodology.
Ans. Various Level of Activities under ABC Methodology
Level of Activities Meaning
1. Unit level activities These are those activities for which the consumption
of resources can be identified with the number of units
produced.
2. Batch level activities The activities such as setting up of a machine or
processing a purchase order are performed each time
a batch of goods is produced. The cost of batch related
activities varies with number of batches made, but is
common (or fixed) for all units within the batch.
3. Product level activities These are the activities which are performed to support
different products in product line.
4. Facilities level activities These are the activities which cannot be directly
attributed to individual products. These activities are
necessary to sustain the manufacturing process and
are common and joint to all products manufactured.

Q-26 The following budgeted information relates to N Ltd. for the year 2021:
Products
X Y Z
Production and Sales (units) 1,00,000 80,000 60,000
(` ) (` ) (` )
Selling price per unit 90 180 140
Direct cost per unit 50 90 95
Hours Hours Hours
Machine department 3 4 5
(machine hours per unit)
Assembly department 6 4 3
(direct labour hours per unit)
The estimated overhead expenses for the year 2021 will be as below:
Machine Department ` 73,60,000
Assembly Department ` 55,00,000
Overhead expenses are apportioned to the products on the following basis:
Machine Department On the basis of machine hours
Assembly Department On the basis of labour hours
After a detailed study of the activities the following cost pools and their respe ctive cost
drivers are found:
Cost Pool Amount (`) Cost Driver Quantity
Machining services 64,40,000 Machine hours 9,20,000 hours
Assembly services 44,00,000 Direct labour hours 11,00,000 hours
Set-up costs 9,00,000 Machine set-ups 9,000 set-ups
Order processing 7,20,000 Customer orders 7,200 orders
Purchasing 4,00,000 Purchase orders 800 orders
As per an estimate the activities will be used by the three products:
Products
X Y Z
Machine set-ups 4,500 3,000 1,500
Customer orders 2,200 2,400 2,600
Purchase orders 300 350 150
You are required to PREPARE a product-wise profit statement using:
(i) Absorption costing method;
(ii) Activity-based method.
Ans.(i) Profit Statement using Absorption costing method:
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000 2,40,000
C. Sales Value (‘) [A×B] 90,00,000 1,44,00,000 84,00,000 3,18,00,000

E. Direct Cost (`) [A×D] 50,00,000 72,00,000 57,00,000 1,79,00,000

F. Overheads:
(i) Machine department 24,00,000 25,60,000 24,00,000 73,60,000
(`) (Working note-1)
(ii) Assembly department 30,00,000 16,00,000 9,00,000 55,00,000
(`) (Working note-1)
G. Total Cost (`) [E+F] 1,04,00,000 1,13,60,000 90,00,000 3,07,60,000
H. Profit (C-G) (14,00,000) 30,40,000 (6,00,000) 10,40,000
(ii) Profit Statement using Activity based costing (ABC) method:
X Y Z
A. Sales Quantity 1,00,000 80,000 60,000
B. Selling price per unit 90 180 140
(`)
C. Sales Value (`) [A×B] 90,00,000 1,44,00,000 84,00,000 3,18,00,000
E. Direct Cost (`) [A×D] 50,00,000 72,00,000 57,00,000 1,79,00,000
F. Overheads: (Refer
working note-3)
(i) Machining services (`) 21,00,000 22,40,000 21,00,000 64,40,000
(ii) Assembly services (`) 24,00,000 12,80,000 7,20,000 44,00,000
(iii) Set-up costs (`) 4,50,000 3,00,000 1,50,000 9,00,000
(iv) Order processing (`) 2,20,000 2,40,000 2,60,000 7,20,000
(v) Purchasing (`) 1,50,000 1,75,000 75,000 4,00,000
G. Total Cost (`) [E+F] 1,03,20,000 1,14,35,000 90,05,000 3,07,60,000
H. Profit (`) (C-G) (13,20,000) 29,65,000 (6,05,000) 10,40,000
Working Notes:
1.
Products
X Y Z Total
A. Production (units) 1,00,000 80,000 60,000
B. Machine hours per unit 3 4 5
C. Total Machine hours 3,00,000 3,20,000 3,00,000 9,20,000
[A×B]
D. Rate per hour (`) 8 8 8
E. Machine Dept. cost [C×D] 24,00,000 25,60,000 24,00,000 73,60,000
F. Labour hours per unit 6 4 3
G. Total labour hours [A×F] 6,00,000 3,20,000 1,80,000 11,00,000
H. Rate per hour (`) 5 5 5
I Assembly Dept. cost [G×H] 30,00,000 16,00,000 9,00,000 55,00,000

`73,60,000
Machine hour rate = =`8
9,20,000 hours
` 55,60,000
Labour hour rate = =`5
11,00,000 hours
2. Calculation of cost driver rate
Cost Pool Amount Cost Driver Quantity Driver rate
(`) (`)
Machining services 64,40,000 Machine hours 9,20,000 hours 7.00
Assembly services 44,00,000 Direct labour hours 11,00,000 hours 4.00
Set-up costs 9,00,000 Machine set-ups 9,000 set-ups 100.00
Order processing 7,20,000 Customer orders 7,200 orders 100.00
Purchasing 4,00,000 Purchase orders 800 orders 500.00
3. Calculation of activity-wise cost
Products
X Y Z Total
A. Machining hours (Refer
Working note-1) 3,00,000 3,20,000 3,00,000 9,20,000
B. Machine hour rate (`) 7 7 7
(Refer Working note-2)
C. Machining services 21,00,000 22,40,000 21,00,000 64,40,000
cost (`) [A×B]
D. Labour hours (Refer 6,00,000 3,20,000 1,80,000 11,00,000
Working note-1)
E. Labour hour rate (`) 4 4 4
F. Assembly services cost (`)
[D×E] 24,00,000 12,80,000 7,20,000 44,00,000
G. Machine set-ups 4,500 3,000 1,500 9,000
H. Rate per set-up (`) 100 100 100
I. Set-up cost (`) [G×H] 4,50,000 3,00,000 1,50,000 9,00,000
J. Customer orders 2,200 2,400 2,600 7,200
K. Rate per order (`) (Refer 100 100 100
Working note-2)
L. Order processing cost 2,20,000 2,40,000 2,60,000 7,20,000
(`) [J×K]
M. Purchase orders 300 350 150 800
N. Rate per order (`) (Refer
Working note-2) 500 500 500
O. Purchasing cost (`) [M×N] 1,50,000 1,75,000 75,000 4,00,000

Q-27 PCP Limited belongs to the apparel industry. It specializes in the distribution of fashionable garments.
It buys from the industry and resells the same to the following two different supermarkets:
(i) Supermarket A dealing in Adults’ garments (Age group 15 - 30)
(ii) Supermarket B dealing in Kids’ garments (Age group 5 - 10)
The following data for the month of April in respect of PCP Limited has been reported:
Supermarket A (`) Supermarket B (`)
Average revenue per delivery 1,69,950 57,750
Average cost of goods sold per delivery 1,65,000 55,000
Number of deliveries 660 1,650
In the past, PCP Limited has used gross margin percentage to evaluate the relative profitability of its
supermarket segments.
The company plans to use activity –based costing for analysing the profitability of its supermarket
segments.
The April month’s operating costs (other than cost of goods sold) of PCP Limited are ‘ 16,55,995. These
operating costs are assigned to five activity areas. The cost in each area and Activity analysis including
cost driver for the month of April are as follows:
Activity Area Total costs (`) Cost Driver
Store delivery 3,90,500 Store deliveries
Cartons dispatched to store 4,15,250 Cartons dispatched to a store per delivery
Shelf-stocking at customer store 64,845 Hours of shelf-stocking
Line-item ordering 3,45,400 Line-items per purchase order
Customer purchase order processing 4,40,000 Purchase orders by customers
Other data for the month of April include the following:
Supermarket A Supermarket B
Total number of store deliveries 1,100 2,805
Average number of cartons shipped per store delivery 250 50
Average number of hours of shelf-stocking per store delivery 6 1.5
Average number of line items per order 14 12
Total number of orders 770 1,980
Required:
(i) COMPUTE gross-margin percentage for each of its supermarket segments and compute PCP
Limited’s operating income.
(ii) COMPUTE the operating income of each supermarket segments using the activity-based costing
information.

Ans.
(i) PCP Limited’s
Statement of operating income and gross margin percentage
for each of its supermarket segments
Particulars Supermarket A Supermarket B Total
Revenues: (`) 11,21,67,000 9,52,87,500 20,74,54,500
(660 × ` 1,69,950) (1,650 × ` 57,750)
Less: Cost of goods sold: (`) 10,89,00,000 9,07,50,000
(660 × ` 1,65,000) (1650 × ` 55,000) 19,96,50,000
Gross Margin: (`) 32,67,000 45,37,500 78,04,500
Less: Other operating costs: (`) 16,55,995
Operating income: (`) 61,48,505
Gross Margin 2.91% 4.76 % 3.76%
Operating income % 2.96%
(ii) Operating Income Statement of each distribution channel
in April (Using the Activity based Costing information)
Supermarket A Supermarket B
Gross margin (`) : (A) 32,67,000 45,37,500
(Refer to (i) part of the answer)
Operating cost (`): (B) 6,55,600 10,00,395
Operating income (`): (A–B) 26,11,400 35,37,105
Operating income (in %) 2.33 3.71
(Operating income/Revenue) ×100
Working note:
Computation of rate per unit of the cost allocation base for each of the five activity
areas for the month of April
(`)
Store delivery 100 per delivery
[` 3,90,500/ (1,100 + 2,805 store deliveries)]
Cartons dispatched 1 per carton dispatch
[` 4,15,250/ {(250×1,100) +( 50×2,805)} carton dispatches]
Shelf-stocking at customer store (`) 6 per hour
[` 64,845/ {(6×1,100) + (1.5×2,805)} hours]
Line item ordering 10 per line item order
[` 3,45,400/ {(14×770) + (12×1,980)} line items]
Customer purchase order processing 160 per order
[` 4,40,000/ (770 + 1,980 orders)]

Computation of operating cost of each distribution channel:

Supermarket A (`) Supermarket B (`)
Store delivery 1,10,000 2,80,500
(` 100 × 1,100 deliveries) (` 100 × 2,805 deliveries)
Cartons dispatched 2,75,000 1,40,250
(` 1× 250 cartons × 1,100 deliveries) (` 1 × 50 cartons × 2,805 deliveries)
Shelf stocking 39,600 25,245
(` 6 × 1,100 deliveries × 6 Av. hrs.) (` 6 × 2,805 deliveries × 1.5 Av. hrs)
Line item ordering 1,07,800 2,37,600
(` 10 × 14 line item x 770 orders) (` 10 × 12 line item x 1,980 orders)
Customer purchase 1,23,200 3,16,800
order processing (` 160 × 770 orders) (` 160 × 1,980 orders)
Operating cost 6,55,600 10,00,395
Q-28 MG Ltd. manufactures three types of products namely A, B and C. The data relating to a period are as
under:
Particulars A B C
Machine hours per unit 10 18 14
Direct Labour hours per unit 4 12 8
Direct Material per unit (`) 1,350 1,200 1,800
Currently the company uses traditional costing method and absorbs all production overheads on the
basis of machine hours. The machine hour rate of overheads is ` 90 per hour. Direct labour hour rate is
` 300 per hour.
The company proposes to use activity based costing system and the activity analysis is as under:
Particulars A B C
Batch size (units) 150 500 1,000
Number of purchase orders per batch 3 10 8
Number of inspections per batch 5 4 3
The total production overheads are analysed as under:
Machine set up costs 20%
Machine operation costs 30%
Inspection costs 40%
Material procurement related costs 10%
Required:
(i) CALCULATE the cost per unit of each product using traditional method of absorbing all production
overheads on the basis of machine hours.
(ii) CALCULATE the cost per unit of each product using activity based costing principles.

Ans
(i) Statement Showing “Cost per unit - Traditional Method”
Particulars of Costs A B C
(`) (`) (`)
Direct Materials 1,350 1,200 1,800
Direct Labour [(4, 12, 8 hours) x ‘ 300] 1,200 3,600 2,400
Production Overheads [(10, 18, 14 hours) x ‘ 90] 900 1,620 1,260
Cost per unit 3,450 6,420 5,460
(ii) Statement Showing “Cost per unit - Activity Based Costing”
Products A B C
(`) (`) (`)
Direct Materials (1350, 1200, 1800) 40,50,000 60,00,000 3,60,00,000
Direct Labour (1200, 3600, 2400) 36,00,000 1,80,00,000 4,80,00,000
Machine Related Costs @ ` 27 per hour
(30,000, 90,000, 2,80,000) 8,10,000 24,30,000 75,60,000
Setup Costs @ ` 1,44,000 per setup (20, 10, 20) 28,80,000 14,40,000 28,80,000
Inspection Costs @ ` 72,000 per inspection (100, 40, 60) 72,00,000 28,80,000 43,20,000
Purchase Related Costs @ ` 11,250 per purchase (60, 100, 160) 6,75,000 11,25,000 18,00,000
Total Costs 1,92,15,000 3,18,75,000 10,05,60,000
Cost per unit (Total Cost  Units) 6,405 6,375 5,028
Working Notes:
1. Number of Batches, Purchase Orders, and Inspections-
Particulars A B C Total
A. Production (units) 3,000 5,000 20,000
B. Batch Size (units) 150 500 1,000
C. Number of Batches [A ÷ B] 20 10 20 50
D. Number of Purchase Order per batch 3 10 8
E. Total Purchase Orders [C x D] 60 100 160 320
F. Number of Inspections per batch 5 4 3
G. Total Inspections [C x F] 100 40 60 200
2. Total Machine Hours-
Particulars A B C
A. Machine Hours per unit 10 18 14
B. Production (units) 3,000 5,000 20,000
C. Total Machine Hours [A x B] 30,000 90,000 2,80,000

Total Machine Hours = 4,00,000

Total Production Overheads-
= 4,00,000 hrs. x ` 90 = ` 3,60,00,000
3. Cost Driver Rates-
Cost Pool % Overheads Cost Driver Cost Cost
(` ) Basis Driver Driver
Rate
(Units) (` )
Setup 20% 72,00,000 Number of 50 1,44,000
batches per Setup
Inspection 40% 1,44,00,000 Number of 200 72,000
inspections per Inspection
Purchases 10% 36,00,000 Number of 320 11,250
purchases per Purchase
Machine Operation 30% 1,08,00,000 Machine 4,00,000 27 per
Hours Machine Hour

CHAPTER- 6
COST SHEET
Q-1 From the following data of Arnav Metallic Ltd., Calculate Cost of production :
Amount (`)
(i) Repair & maintenance paid for plant & machinery 9,80,500
(ii) Insurance premium paid for plant & machinery 96,000
(iii) Raw materials purchased 64,00,000
(iv) Opening stock of raw materials 2,88,000
(v) Closing stock of raw materials 4,46,000
(vi) Wages paid 23,20,000
(vii) Value of opening Work-in-process 4,06,000
(viii) Value of closing Work-in-process 6,02,100
(ix) Quality control cost for the products in manufacturing process 86,000
(x) Research & development cost for improvement in production process 92,600
(xi) Administrative cost for:
- Factory & production 9,00,000
- Others 11,60,000
(xii) Amount realised by selling scrap generated during the manufacturing process 9,200
(xiii) Packing cost necessary to preserve the goods for further processing 10,200
(xiv) Salary paid to Director (Technical) 8,90,000
Ans. Calculation of Cost of Production of Arnav Metallic Ltd. for the period…..
Raw materials purchased 64,00,000
Add: Opening stock 2,88,000
Less: Closing stock (4,46,000)
Material consumed 62,42,000
Wages paid 23,20,000
Prime cost 85,62,000
Repair and maintenance cost of plant & machinery 9,80,500
Insurance premium paid for plant & machinery 96,000

Quality control cost 86,000

Research & development cost 92,600
Administrative overheads related with factory and production 9,00,000
1,07,17,100
Add: Opening value of W-I-P 4,06,000
Less: Closing value of W-I-P (6,02,100)
1,05,21,000
Less: Amount realised by selling scrap (9,200)
Add: Primary packing cost 10,200
Cost of Production 1,05,22,000
Notes:
(i) Other administrative overhead does not form part of cost of production.
(ii) Salary paid to Director (Technical) is an administrative cost.
Q-2 Following information relate to a manufacturing concern for the year ended 31st March, 2019:
(`)
Raw Material (opening) 2,28,000
Raw Material (closing) 3,05,000
Purchases of Raw Material 42,25,000
Freight Inwards 1,00,000
Direct wages paid 12,56,000
Direct wages-outstanding at the end of the year 1,50,000
Factory Overheads 20% of prime cost
Work-in-progress (opening) 1,92,500
Work-in-progress (closing) 1,40,700
Administrative Overheads (related to production) 1,73,000
Distribution Expenses `16 per unit
Finished Stock (opening)- 1,217 Units 6,08,500
Sale of scrap of material 8,000
The firm produced 14,000 units of output during the year. The stock of finished goods at the end of the
year is valued at cost of production. The firm sold 14,153 units at a price of `618 per unit during the year.
PREPARE cost sheet of the firm.
Ans. Cost sheet for the year ended 31st March, 2019.
Units produced - 14,000 units
Units sold - 14,153 units
Add: Freight Inward 1,00,000
Add: Opening value of raw materials 2,28,000
Less: Closing value of raw materials (3,05,000)
42,48,000
Less: Sale of scrap of material (8,000)
-182- Chapter-6 : Cost Sheet

Materials consumed 42,40,000

Direct Wages (12,56,000 + 1,50,000) 14,06,000
Factory overheads (20% of Prime Cost) 11,29,200
Factory Cost 68,27,000
Add: Administrative overheads 1,73,000
Cost of Production 70,00,000
Add: Value of opening finished stock 6,08,500
Less: Value of closing finished stock (5,32,000)
[` 500(70,00,000/14,000) × 1,064]
(1,217+ 14,000 – 14,153 = 1,064 units)
Cost of Goods Sold 70,76,500
Distribution expenses (`16 × 14,153 units) 2,26,448
Cost of Sales 73,02,948
Profit (Balancing figure) 14,43,606
Sales (` 618 × 14,153 units) 87,46,554
Q-3 From the following data of Arnav Metallic Ltd., CALCULATE Cost of production:
Amount (`)
(ii) Insurance premium paid for inventories 26,000
(iii) Insurance premium paid for plant & machinery 96,000
(iv) Raw materials purchased 64,00,000
(v) Opening stock of raw materials 2,88,000
(vi) Closing stock of raw materials 4,46,000
(vii) Wages paid 23,20,000
(viii) Value of opening Work-in-process 4,06,000
(ix) Value of closing Work-in-process 6,02,100
(x) Quality control cost for the products in manufacturing process 86,000
(xi) Research & development cost for improvement in production process 92,600
(xii) Administrative cost for:
- Others 11,60,000
(xiii) Amount realised by selling scrap generated during the manufacturing process 9,200
(xiv) Packing cost necessary to preserve the goods for further processing 10,200
(xv) Salary paid to Director (Technical) 8,90,000

Ans. Calculation of Cost of Production of Arnav Metallic for the period…..

Insurance premium paid for inventories 26,000
1,07,43,100
1,05,47,000
Notes:
Q-4 From the following figures, Calculate cost of production and profit for the month of March 2018.
Amount (`) Amount (`)
Stock on 1st March, 2018 Purchase of raw materials 28,57,000
- Raw materials 6,06,000 Sale of finished goods 1,34,00,000
- Finished goods 3,59,000 Direct wages 37,50,000
Stock on 31st March, 2018 Factory expenses 21,25,000
- Raw materials 7,50,000 Office and administration
expenses 10,34,000
- Finished goods 3,09,000 Selling and distribution
expenses 7,50,000
Work-in-process: Sale of scrap 26,000
- On 1st March, 2018 12,56,000
- On 31st March, 2018 14,22,000

Ans. Calculation of Cost of Production and Profit for the month ended April 2018:
Materials consumed:
- Opening stock 6,06,000
- Add: Purchases 28,57,000
34,63,000
- Less: Closing stock (7,50,000) 27,13,000
Direct wages 37,50,000
Factory expenses 21,25,000
85,88,000
Add: Opening W-I-P 12,56,000
Less: Closing W-I-P (14,22,000)
Factory cost 84,22,000
Less: Sale of scrap (26,000)
Add: Opening stock of finished goods 6,06,000
Less: Closing stock of finished goods (3,59,000)
Office and administration expenses 10,34,000
Selling and distribution expenses 7,50,000
Cost of Sales 1,04,27,000
Profit (balancing figure) 29,73,000
Sales 1,34,00,000
Q-5 DFG Ltd. manufactures leather bags for office and school purpose. The followinginformation is related
with the production of leather bags for the month of September 2019.
(i) Leather sheets and cotton cloths are the main inputs, and the estimated requirementper bag is
two meters of leather sheets and one meter of cotton cloth. 2,000 meter of leather sheets and
1,000 meter of cotton cloths are purchased at `3,20,000 and `15,000 respectively. Freight paid on
purchases is `8,500.
(ii) Stitching and finishing need 2,000 man hours at `80 per hour.
(iii) Other direct cost of `10 per labour hour is incurred.
(iv) DFG has 4 machines at a total cost of `22,00,000. Machine has a life of 10 years with a scrape value
of 10% of the original cost. Depreciation is charged on straight line method.
(v) The monthly cost of administrative and sales office staffs are `45,000 and `72,000respectively.
DFG pays `1,20,000 per month as rent for a 2400 sq.feet factory premises. The administrative and
sales office occupies 240 sq. feet and 200 sq. feet respectively of factory space.
(vi) Freight paid on delivery of finished bags is `18,000.
(vii) During the month 35 kg. of leather and cotton cuttings are sold at `150 per kg.
(viii) There is no opening and closing stocks for input materials. There is 100 bags in stock at the end of
the month.
Required:
PREPARE a cost sheet following functional classification for the month of September 2019.

Ans. No. of bags manufactured = 1,000 units

Cost sheet for the month of September 2019
Particulars Total Cost per
Cost (`) unit (`)
1. Direct materials consumed:
- Leather sheets 3,20,000 320.00
- Cotton cloths 15,000 15.00
Add: Freight paid on purchase 8,500 8.50
2. Directwages (`80 × 2,000 hours) 1,60,000 160.00
3. Direct expenses (` 10 × 2,000 hours) 20,000 20.00
4. Prime Cost 5,23,500 523.50
5. Factory Overheads: Depreciation on machines
{(`22,00,000×90%)÷120 months} 16,500 16.50
Apportion cost of factory rent 98,000 98.00
6. Works/ Factory Cost 6,38,000 638.00
7. Less: Realisable value of cuttings (` 150×35 kg.) (5,250) (5.25)
8. Cost of Production 6,32,750 632.75
9. Add: Opening stock of bags 0
10. Less: Closing stock of bags (100 bags × ` 632.75) (63,275)
11. Cost of Goods Sold 5,69,475 632.75
12. Add: Administrative Overheads:
- Staff salary 45,000 45.00
- Apportioned rent for administrative office 12,000 12.00
13. Add: Selling and Distribution Overheads
- Apportioned rent for sales office 10,000 11.11
- Freight paid on delivery of bags 18,000 20.00
14. Cost of Sales (18+19+20) 7,26,475 800.86
Apportionment of Factory rent:
To factory building {(`1,20,000 ÷ 2400 sq.feet) × 1,960 sq. feet} = ` 98,000
To administrative office {(`1,20,000 ÷ 2400 sq.feet) × 240 sq. feet} = `12,000
To sale office {(`1,20,000 ÷ 2400 sq.feet) × 200 sq. feet} = `10,000
Q-6 XYZ a manufacturing firm, has revealed following information for September, 2019:
1st September 30th September
Raw Materials 2,42,000 2,92,000
Works-inrprogress 2,00,000 5,00,000
The firm incurred following expenses for a targeted production of 1,00,000 units during the month :
Consumable Stores and spares of factory 3,50,000
Research and development cost for process improvements 2,50,000
Quality control cost 2,00,000
Packing cost (secondary) per unit of goods sold 2
Lease rent of production asset 2,00,000

Administrative Expenses (General) 2,24,000

Selling and distribution Expenses 4,13,000
Finished goods (opening) Nil
Finished goods (closing) 5000 units
Defective output which is 4% of targeted production, realizes ` 61per unit.
Closing stock is valued at cost of production (excluding administrative expenses)
Cost of goods sold, excluding administrative expenses amounts to ` 78,26,000.
Direct employees cost is Yi of the cost of material consumed. Selling price of the output is `110 per
unit. You are required to :
(i) Calculate the Value of material purchased
(ii) Prepare cost sheet showing the profit earned by the firm.
Ans. Workings:
1. Calculation of Sales Quantity:
Particular Units
Production units 1,00,000
Less: Defectives (4%×1,00,000 units) 4,000
Less: Closing stock of finished goods 5,000
No. of units sold 91,000
2. Calculation of Cost of Production

Particular Amount (`)
Cost of Goods sold (given) 78,26,000
Add: Value of Closing finished goods 4,30,000
 ` 78,26,000 
 91,000 units × 5,000 units 
 
3. Calculation of Factory Cost
Less: Quality Control Cost (2,00,000)
Less: Research and Development Cost (2,50,000)
Add: Credit for Recoveries/Scrap/ 2,44,000
By-Products/ misc. income
(1,00,000 units × 4% × ` 61)
4. Calculation of Gross Factory Cost
Cost of Factory Cost 80,50,000
Less: Opening Work in Process (2,00,000)
Add: Closing Work in Process 5,00,000
Cost of Gross Factory Cost 83,50,000

5. Calculation of Prime Cost

Cost of Gross Factory Cost 83,50,000
Less: Consumable stores & spares (3,50,000)
Less: Lease rental of production assets (2,00,000)
6. Calculation of Cost of Materials Consumed & Labour cost
Let Cost of Material Consumed = M and Labour cost = 0.5M
Prime Cost = Cost of Material Consumed + Labour Cost
78,00,000 = M + 0.5M
M = 52,00,000
Therefore, Cost of Material Consumed = ` 52,00,000 and
Labour Cost = ` 26,00,000
(i) Calculation of Value of Materials Purchased
Cost of Material Consumed 52,00,000
Add: Value of Closing stock 2,92,000
Less: Value of Opening stock (2,42,000)
Value of Materials Purchased 52,50,000
Cost Sheet
Sl. Particulars Total Cost (`)
Opening Stock of Raw Material 2,42,000
Add: Additions/ Purchases [balancing figure as per requirement (i)] 52,50,000
Less: Closing stock of Raw Material (2,92,000)
Material Consumed 52,00,000
2. Direct employee (labour) cost 26,00,000
3. Prime Cost (1+2) 78,00,000
4. Add: Works/ Factory Overheads
Consumable stores and spares 3,50,000
Lease rent of production asset 2,00,000
5. Gross Works Cost (3+4) 83,50,000
6. Add: Opening Work in Process 2,00,000
7. Less: Closing Work in Process (5,00,000)
8. Works/ Factory Cost (5+6-7) 80,50,000
9. Add: Quality Control Cost 2,00,000
10. Add: Research and Development Cost 2,50,000
11. Less: Credit for Recoveries/Scrap/By-Products/misc. income (2,44,000)

12. Cost of Production (8+9+10-11) 82,56,000

13. Add: Opening stock of finished goods -
14. Less: Closing stock of finished goods (5000 Units) (4,30,000)
15. Cost of Goods Sold (12+13-14) 78,26,000
16. Add: Administrative Overheads (General) 2,24,000
17. Add: Secondary packing 1,82,000
18. Add: Selling Overheads& Distribution Overheads 4,13,000
19. Cost of Sales (15+16+17+18) 86,45,000
20. Profit 13,65,000
21. Sales 91,000 units@ ` 110 per unit 1,00,10,000
Q-7 M/s Areeba Private Limited has a normal production capacity of 36,000 units of toys perannum. The
estimated costs of production are as under:
(i) Direct Material ` 40 per unit
(ii) Direct Labour ` 30 per unit (subject to a minimum of ` 48,000 p.m.)
(iii) Factory Overheads:
(a) Fixed ` 3,60,000 per annum
(b) Variable ` 10 per unit
(c) Semi-variable ` 1,08,000 per annum up to 50% capacity and additional ` 46,800 for every
20% increase in capacity or any part there of.
(iv) Administrative Overheads ` 5, 18,400 per annum (fixed)
(v) Selling overheads are incurred at ` 8 per unit.
(vi) Each unit of raw material yields scrap which is sold at the rate of ` 5 per unit.
(vii) In year 2019, the factory worked at 50% capacity for the first three months but it was expected
that it would work at 80% capacity for the remaining nine months.
(viii) During the first three months, the selling price per unit was ` 145.
(i) Prepare a cost sheet showing Prime Cost, Works Cost, Cost of Production and Cost of Sales.
(ii) Calculate the selling price per unit for remaining nine months to achieve the total annual profit
of ` 8,76,600.
Ans. (i) Cost Sheet of M/s Areeba Pvt. Ltd. for the year 2019.
Normal Capacity: 36,000 units p.a.
Particulars 3 Months 9 Months
4,500 Units 21,600 units
Amount(`) Cost perunit (`) Amount(`) Cost perunit (`)
Direct material 1,80,000 8,64,000
Less: Scrap (22,500) (1,08,000)
Materials consumed 1,57,500 35 7,56,000 35
Direct Wages 1,44,000 32 6,48,000 30
Prime Cost 3,01,500 67 14,04,000 65

Factory overheads:
- Fixed 90,000 2,70,000
- Variable 45,000 2,16,000
- Semi variable 27,000 36 1,51,200 29.50
Works Cost 4,63,500 103 20,41,200 94.50
Add: Administrative overheads 1,29,600 28.80 3,88,800 18
Cost of Production 5,93,100 131.80 24,30,000 112.5
Selling Overheads 36,000 8 1,72,800 8
Cost of Sales 6,29,100 139.80 26,02,800 120.5
Working Notes:
1. Calculation of Costs
Particulars 4,500 units 21,600 units
Material 1,80,000 (` 40 × 4,500 units) 8,64,000 (` 40 × 21,600 units)
Wages 1,44,000 (Max. of ` 30 × 4,500units 6,48,000 (21600 Units × 30)
= ` 1,35,000 and ` 48,000× 3 months
= ` 1,44,000)
Variable Cost 45,000 (` 10 × 4,500 units) 2,16,000 (` 10 × 21,600 units)
 ` 1,08,000   ` 1,08,000 
Semi-variable Cost 27,000   3 Months  1,51,200   9 Months  
 12 months   12 months 
+ 46,800 (for 20 % increase)
+ 23,400 (for 10% increase)
Selling Overhead 36,000 (` 8 × 4,500 units) 1,72,800(` 8 × 21,600 units)
Notes:
1. Alternatively scrap of raw material can also be reduced from Work cost.
2. Administrative overhead may be treated alternatively as a part of general overhead.
In that case, Works Cost as well as Cost of Production will be same i.e. ` 4,63,500 and Cost of Sales will
remain same as ` 6,29,100.
(ii) Calculation of Selling price for nine months period

Total Cost of sales ` (6,29,100 +26,02,800) 32,31,900
Add: Desired profit 8,76,600
Total sales value 41,08,500
Less: Sales value realised in first three months (`145 × 4,500 units) (6,52,500)
Sales Value to be realised in next nine months 34,56,000
No. of units to be sold in next nine months 21,600
Selling price per unit (` 34,56,000 ÷ 21,600 units) 160

Q-8 Following details are provided by M/s ZIA Private Limited for the quarter ending 30 September, 2018:
(i) Direct expenses ` 1,80,000
(ii) Direct wages being 175% of factory overheads ` 2,57,250
(iii) Cost of goods sold ` 18,75,000
(iv) Selling & distribution overheads ` 60,000
(v) Sales ` 22,10,000
(vi) Administration overheads are 10% of factory overheads
Stock details as per Stock Register:
Particulars 30.06.2018 30.09.2018
` `
Raw material 2,45,600 2,08,000
Work-in-progress 1,70,800 1,90,000
Finished goods 3,10,000 2,75,000
You are required to prepare a cost sheet showing:
(i) Raw material consumed
(ii) Prime cost
(iii) Factory cost
(iv) Cost of goods sold
(v) Cost of sales and profit
Ans. Cost Sheet
(for the quarter ending 30 September 2018)
Amount (`)
(i) Raw materials consumed
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,22,650*
Less: Closing stock of raw materials (2,08,000)
Raw materials consumed 12,60,250
Add: Direct wages (1,47,000×175%) 2,57,250
Direct Expenses 1,80,000
(ii) Prime cost 16,97,500
Add: Factory overheads (2,57,250/175%) 1,47,000
Gross Factory cost 18,44,500
Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost 18,25,300
Add: Administration overheads (10% of factory overheads) 14,700
(iv) Cost of goods sold 18,75,000
Add: Selling & distribution overheads 60,000
Cost of sales 19,35,000
(v) Net Profit 2,75,000
Sales 22,10,000

*(18,75,000 + 2,75,000 – 3,10,000– (1,47,000× 10%)+ 1,90,000–1,70,800– (2,57,250× 100/175%) - 1,80,000

– 2,57,250 + 2,08,000 – 2,45,600)= 12,22,650
Working notes :
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw material
Raw material consumed = Prime cost - Direct wages - Direct expenses
Factory Overheads = 2,57,250*100/175
Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads
Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening stock of finished
goods – Administrative overheads
Net Profit = Sales - Cost of sales
Alternative solution
Cost Sheet
(for the quarter ending 30 September 2018)
Amount (`)
(i) Raw materials consumed
Opening stock of raw materials 2,45,600
Add: Purchase of materials 12,37,350*
Less: Closing stock of raw materials (2,08,000)
Raw Material consumed 12,74,950
Add: Direct wages (1,47,000×175% 2,57,250
Direct Expenses 1,80,000
(ii) Prime cost 17,12,,200
Add: Factory overheads (2,57,250/175%) 1,47,000
Gross Factory cost 18,59,200
Add: Opening work-in-process 1,70,800
Less: Closing work-in-process (1,90,000)
(iii) Factory cost/works cost/cost of production 18,40,000
(iv) Cost of goods sold 18,75,000
Add: Administration overheads (10% of factory overheads) 14,700
Add: Selling & distribution overheads 60,000
(v) Net Profit 2,60,300
Sales 22,10,000
*(18,75,000 + 2,75,000 – 3,10,000+ 1,90,000–1,70,800– 1,47,500 - 1,80,000 – 2,57,250 + 2,08,000 – 2,45,600)=
12,37,350
Working notes
Purchase of raw materials = Raw material consumed + Closing stock - opening stock of raw material
Raw material consumed = Prime cost - Direct wages - Direct expenses
Factory Overheads = 257250*100/175
Prime cost = Factory cost + Closing WIP – Opening WIP – Factory overheads

Factory Cost = Cost of Production goods sold + Closing stock of Finished goods – Opening stock of finished
goods
Net Profit = Sales - Cost of sales.
Q-9 Following information relate to a manufacturing concern for the year ended 31st March, 2018:
`
Raw Material (opening) 2,28,000
Raw Material (closing) 3,05,000
Purchases of Raw Material 42,25,000
Freight Inwards 1,00,000
Direct wages-outstanding at the end of the year 1,50,000
Factory Overheads 20% of prime cost
Work-in-progress (opening) 1,92,500
Wo9rk-in-progres (closing) 1,40,700
Administrative Overheads (related to production) 1,73,000
Distribution Expenses ` 16 per unit
Finished Stock (opening)-1217 Units 6,08,500
Sale of scrap of material 8,000
The firm produced 14000 units of output during the year. The stock of finished goods at the end of the
year is valued at cost of production. The firm sold 14153 units at a price of ` 618 per unit during the year.
Prepare cost sheet of the firm.
Ans. Cost sheet for the year ended 31st March, 2018.
Units produced - 14,000 units
Units sold - 14,153 units
Add: Freight Inward 1,00,000
Add: Opening value of raw materials 2,28,000
Less: Closing value of raw materials (3,05,000)
42,48,000
Less: Sale of scrap of material 8,000
Direct Wages (12,56,000 + 1,50,000) 14,06,000
Factory overheads (20% of ` Prime Cost) 11,29,200
Add: Administrative overheads 1,73,000
Add: Value of opening finished stock 6,08,500
Less: Value of closing finished stock

[` 500(70,00,000/14,000) × 1,064)
(1,217+ 14,000 – 14,153 = 1,064 units) (5,32,000)
Distribution expenses (` 16 × 14,153 units) 2,26,448
Profit (Balancing figure) 14,43,606
Sales (` 618 × 14,153 units) 87,46,554
Q-10 From the following figures, Calculate cost of production and profit for the month of March 20X9.
Amount (Rs.) Amount (Rs.)
Stock on 1st March, 20X9 Purchase of raw materials 28,57,000
- Raw materials 6,06,000 Sale of finished goods 1,34,00,000
- Finished goods 3,59,000 Direct wages 37,50,000
Stock on 31st March, 20X9 Factory expenses 21,25,000
- Raw materials 7,50,000 Office and administration expenses 10,34,000
- Finished goods 3,09,000 Selling and distribution expenses 7,50,000
Work-in-process: Sale of scrap 26,000
- On 1st March, 20X9 12,56,000
- On 31st March, 20X9 14,22,000
Ans. Calculation of Cost of Production and Profit for the month ended March, 20X9:
Particulars Amount (Rs.) Amount (Rs.)
Materials consumed:
- Opening stock 6,06,000
- Add: Purchases 28,57,000
34,63,000
- Less: Closing stock (7,50,000) 27,13,000
Factory expenses 21,25,000
85,88,000
Add: Opening W-I-P 12,56,000
Less: Closing W-I-P (14,22,000)
Less: Sale of scrap (26,000)
Office and administration expenses 10,34,000
Selling and distribution expenses 7,50,000
Sales 1,34,00,000

Q-11 From the following data of A Ltd.,

Calculate
(i) Material Consumed; (ii) Prime Cost and
(iii) Cost of production.
Amount (Rs.)
- Others 11,60,000
(xiii) Amount realised by selling scrap generated during the manufacturing process 9,200
(xiv) Packing cost necessary to preserve the goods for further processing 10,200
(xv) Salary paid to Director (Technical) 8,90,000
Ans.
Calculation of Cost of Production of A Ltd. for the period…..
1,07,43,100
1,05,47,000

Notes:
Q-12 State the advantages of Cost-Sheets.
Ans. Advantages of Cost sheet or Cost Statements
The main advantages of a Cost Sheet are as follows:
(i) It provides the total cost figure as well as cost per unit of production.
(ii) It helps in cost comparison.
(iii) It facilitates the preparation of cost estimates required for submitting tenders.
(iv) It provides sufficient help in arriving at the figure of selling price.
(v) It facilitates cost control by disclosing operational efficiency.
Q-13 From the following data of Arnav Metallic Ltd., Calculate Cost of production:
Amount (Rs.)
- Others 11,60,000
(xiii)Amount realised by selling scrap generated during the manufacturing process 9,200
(xiv)Packing cost necessary to preserve the goods for further processing 10,200
(xv)Salary paid to Director (Technical) 8,90,000
Ans. Calculation of Cost of Production of Arnav Metallic for the period…..


1,07,43,100
1,05,47,000
Notes:
Q-14 Aloe Ltd. has the capacity to produce 2,00,000 units of a product every month. Its works cost at varying
levels of production is as under:
Level Works cost per unit (`)
10% 400
20% 390
30% 380
40% 370
50% 360
60% 350
70% 340
80% 330
90% 320
100% 310
Its fixed administration expenses amount to ` 3,60,000 and fixed marketing expenses amount to `
4,80,000 per month respectively. The variable distribution cost amounts to ` 30 per unit.
It can sell 100% of its output at ` 500 per unit provided it incurs the following further expenditure:
(i) It gives gift items costing ` 30 per unit of sale;
(ii) It has lucky draws every month giving the first prize of ` 60,000; 2nd prize of ` 50,000, 3rd prize of
`40,000 and ten consolation prizes of ` 5,000 each to customers buying the product.
(iii) It spends ` 2,00,000 on refreshments served every month to its customers;
(iv) It sponsors a television programme every week at a cost of ` 20,00,000 per month.
It can market 50% of its output at `560 by incurring expenses referred from (ii) to (iv) above and 30% of its
output at ` 600 per unit without incurring any of the expenses referred from (i) to (iv) above.
PREPARE a cost sheet for the month showing total cost and profit at 30%, 50% and 100% capacity level
& COMPARE its profit.
Ans. Cost Sheet (For the month)
Level of Capacity 30% 50% 100%
60,000 units 1,00,000 units 2,00,000 units
Per unit Total (`) Per unit Total (`) Per unit Total (`)
(`) (`) (`)
Works Cost 380.00 2,28,00,000 360.00 3,60,00,000 310.00 6,20,00,000
Add: Fixed administration 6.00 3,60,000 3.60 3,60,000 1.80 3,60,000
expenses

Add: Fixed marketing expenses 8.00 4,80,000 4.80 4,80,000 2.40 4,80,000
Add: Variable distribution cost 30.00 18,00,000 30.00 30,00,000 30.00 60,00,000
Add: Special Costs:
- Gift items costs - - - - 30.00 60,00,000
- Customers’ prizes* - - 2.00 2,00,000 1.00 2,00,000
- Refreshments - - 2.00 2,00,000 1.00 2,00,000
- Television programme
sponsorship cost - - 20.00 20,00,000 10.00 20,00,000
Cost of sales 424.00 2,54,40,000 422.40 4,22,40,000 386.20 7,72,40,000
Profit (Bal. fig.) 176.00 1,05,60,000 137.60 1,37,60,000 113.80 2,27,60,000
Sales revenue 600.00 3,60,00,000 560.00 5,60,00,000 500.00 10,00,00,000
* Customers’ prize cost:
1st Prize 60,000
2nd Prize 50,000
3rd Prize 40,000
Consolation Prizes (10 × ‘ 5,000) 50,000
Total 2,00,000
Comparison of Profit
30% capacity 50% capacity 100% capacity
Rs.176 Rs.137.6 Rs.113.8

x 100 x 100 x 100
Rs.600 Rs.560 Rs.500
29.33 % 24.57% 22.76%
Profit (in value as well as in percentage) is higher at 30% level of capacity than that at 50% and 100%
level of capacity.
Q-15 The following details are available from the books of R Ltd. for the year ending 31st March 2020:
Purchase of raw materials 84,00,000
Consumable materials 4,80,000
Carriage inward 1,72,600
Wages to foreman and store keeper 8,40,000
Other indirect wages to factory staffs 1,35,000

Expenditure on research and development on new production technology 9,60,000

Salary to accountants 7,20,000
Employer’s contribution to EPF & ESI 7,20,000
Cost of power & fuel 28,00,000
Production planning office expenses 12,60,000
Salary to delivery staffs 14,30,000
Income tax for the assessment year 2019-20 2,80,000
Fees to statutory auditor 1,80,000
Fees to cost auditor 80,000
Fees to independent directors 9,40,000
Donation to PM-national relief fund 1,10,000
Value of sales 2,82,60,000
Position of inventories as on 01-04-2019:
- Raw Material 6,20,000
- W-I-P 7,84,000
- Finished goods 14,40,000
Position of inventories as on 31-03-2020:
- Raw Material 4,60,000
- W-I-P 6,64,000
- Finished goods 9,80,000
From the above information PREPARE a cost sheet for the year ended 31st March 2020.
Ans. Statement of Cost of R Ltd. for the year ended 31st March, 2020:
Sl. Particulars Amount (`) Amount (`)
No.
(i) Material Consumed:
- Raw materials purchased 84,00,000
- Carriage inward 1,72,600
Add: Opening stock of raw materials 6,20,000
Less: Closing stock of raw materials (4,60,000) 87,32,600
(ii) Direct employee (labour) cost:
- Direct wages 60,00,000
- Employer’s Contribution towards PF 7,20,000 67,20,000
& ESIS

(iii) Direct expenses:

- Consumable materials 4,80,000
- Cost of power & fuel 28,00,000 32,80,000
Prime Cost 1,87,32,600
(iv) Works/ Factory overheads:
- Wages to foreman and store keeper 8,40,000
- Other indirect wages to factory staffs 1,35,000 9,75,000
Gross factory cost 1,97,07,600
Factory Cost 1,98,27,600
(v) Research & development cost paid for 9,60,000
improvement in production process
(vi) Production planning office expenses 12,60,000
(vii) Add: Opening stock of finished goods 14,40,000
Cost of Goods Sold 2,25,07,600
Administrative overheads:
- Salary to accountants 7,20,000
- Fees to statutory auditor 1,80,000
- Fees to cost auditor 80,000
- Fee paid to independent directors 9,40,000 19,20,000
(viii) Selling overheads& Distribution overheads:
- Salary to delivery staffs 14,30,000
Sales 2,82,60,000
Note: Income tax and Donation to PM National Relief Fund is avoided in the cost sheet.
Q-16 G Ltd. has the following expenditures for the year ended 31st March, 2021:
Sl. No. Amount (`) Amount (`)
(i) Raw materials purchased 20,00,00,000
(ii) Freight inward 22,41,200
(iii) Wages paid to factory workers 58,40,000
(iv) Royalty paid for production 3,45,200

(v) Amount paid for power & fuel 9,24,000

(vi) Job charges paid to job workers 16,24,000
(vii) Stores and spares consumed 2,24,000
(viii) Depreciation on office building 1,12,000
(ix) Repairs & Maintenance paid for:
- Plant & Machinery 96,000
- Sales office building 36,000 1,32,000
(x) Insurance premium paid for:
- Factory building 36,200 98,600
(xi) Expenses paid for quality control check activities 39,200
(xii) Research & development cost paid
improvement in production process 36,400
(xiii) Expenses paid for pollution control and
engineering & maintenance 53,200
(xiv) Salary paid to Sales & Marketing Managers: 20,24,000
(xv) Salary paid to General Manager 25,12,000
(xvi) Packing cost paid for:
- Primary packing necessary to 1,92,000
maintain quality
- For re-distribution of finished goods 2,24,000 4,16,000
(xvii) Performance bonus paid to sales staffs 7,20,000
(xviii) Value of stock as on 1st April, 2020:
- Raw materials 36,00,000
- Work-in-process 18,40,000
- Finished goods 22,00,000 76,40,000
(xix) Value of stock as on 31st March, 2021:
- Finished goods 36,40,000 73,00,000
Amount realized by selling of scrap and waste generated during manufacturing process – ` 1,72,000/-
From the above data you are requested to PREPARE Statement of cost for G Ltd. for the year ended 31st
March, 2021, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of Production, (iv) Cost of goods sold and
(v) Cost of sales.
Ans. Statement of Cost of G Ltd. for the year ended 31st March, 2021:
Sl. No. Particulars Amount (`) Amount (`)
- Raw materials purchased 20,00,00,000
- Freight inward 22,41,200
Less: Closing stock of raw materials (19,20,000) 20,39,21,200
- Wages paid to factory workers 58,40,000


- Royalty paid for production 3,45,200
- Amount paid for power & fuel 9,24,000
- Job charges paid to job workers 16,24,000 28,93,200
Prime Cost 21,26,54,400
- Stores and spares consumed 2,24,000
- Repairs & Maintenance paid for plant & machinery 96,000
- Insurance premium paid for plant & machinery 62,400
- Insurance premium paid for factory building 36,200
- Expenses paid for pollution
control and engineering & maintenance 53,200 4,71,800
(v) Quality control cost:
- Expenses paid for quality control check activities 39,200
(vi) Research & development cost paid 36,400
(vii) Less: Realisable value on sale of scrap and waste (1,72,000)
(viii) Add: Primary packing cost 1,92,000
(ix) Administrative overheads:
- Depreciation on office building 1,12,000
- Salary paid to General Manager 25,12,000 26,24,000
(x) Selling overheads:
- Repairs & Maintenance paid for sales office building 36,000
- Salary paid to Manager- Sales & Marketing 20,24,000
- Performance bonus paid to sales staffs 7,20,000 27,80,000
(xi) Distribution overheads:
- Packing cost paid for redistribution of finished goods 2,24,000
Q-17 Xim Ltd. manufactures two types of boxes ‘Super’ and ‘Normal’. The cost data for the year ended 31st
March, 2021 is as follows:
(` )
Direct Wages 6,72,000

Production Overhead 2,88,000

Total 21,60,000
There was no work-in-progress at the beginning or at the end of year. It is further ascertained that:
1. Direct materials cost per unit in ‘Super’ was twice as much of direct material in ‘Normal’.
2. 2% cash discount was received for payment made within 30 days to the creditors of Direct materials.
3. Direct wages per unit for ‘Normal’ were 60% of those of ‘Super’.
4. Production overhead per unit was at same rate for both the types of boxes.
5. Administration overhead was 200% of direct labour for each type.
6. Selling cost was ` 1 per ‘Super’ type.
7. Production and sales during the year were as follows:
Production Sales
Type No. of units Type No. of units
Super 60,000 Super 54,000
Normal 1,80,000
8. Selling price was ` 30 per unit for ‘Super’.
9. Company was also involved in a copyright infringement case related to the manufacturing process
of ‘Super’ production. As per the verdict, it had to pay penalty of ` 50,000.
PREPARE Cost Sheet of Xim Ltd. for ‘Super’ showing:
(i) Cost per unit and Total Cost
(ii) Profit per unit and Total Profit
Ans. Cost Sheet of ‘Super’
Particulars Per unit Total (`)
(` )
Direct materials (Working note- (i)) 8.00 4,80,000
Direct wages (Working note- (ii)) 4.00 2,40,000
Prime cost 12.00 7,20,000
Production overhead (Working note- (iii)) 1.20 72,000
Factory Cost 13.20 7,92,000
Administration Overhead (200% of direct wages) 8.00 4,80,000
Cost of production 21.20 12,72,000
Less: Closing stock (60,000 units - 54,000 units) - 1,27,200
Cost of goods sold i.e. 54,000 units 21.20 11,44,800
Selling cost 1.00 54,000
Cost of sales/ Total cost 22.20 11,98,800
Profit 7.80 4,21,200
Sales value (` 30x 54,000 units) 30.00 16,20,000
Working Notes:
(i) Direct material cost per unit of ‘Normal’ = M
Direct material cost per unit of ‘Super’ = 2M
Total Direct Material cost = 2M x 60,000 units + M x 1,80,000 units
Or, ` 12,00,000 = 1,20,000 M + 1,80,000 M

` 12,00,000
Or, M = =`4
3,00,000
Therefore, Direct material Cost per unit of ‘Super’ = 2 x ` 4 = ` 8
(ii) Direct wages per unit for ‘Super’ =W
Direct wages per unit for ‘Normal’ = 0.6W
So, (W x 60,000) + (0.6W x 1,80,000) = ` 6,72,000
W = ` 4 per unit
` 2,88,000
(iii) Production overhead per unit = = ` 1.20
(60,000  1,80,000)
Production overhead for ‘Super’ = ` 1.20 x 60,000 units = ` 72,000
Notes:
1. Administration overhead is specific to the product as it is directly related to direct labour as
mentioned in the question and hence to be considered in cost of production only.
2. Cash discount is treated as interest and finance charges; hence, it is ignored.
3. Penalty paid against the copyright infringement case is an abnormal cost; hence, not included.
Q-18 The following data are available from the books and records of Q Ltd. for the month of April 2020:
Direct Labour Cost = ` 1,20,000 (120% of Factory Overheads)
Cost of Sales = ` 4,00,000
Sales = ` 5,00,000
Accounts show the following figures:
1st April, 2020 30th April, 2020
(` ) (` )
Inventory:
Raw material 20,000 25,000
Work-in-progress 20,000 30,000
Finished goods 50,000 60,000
Other details:
Selling expenses 22,000
General & Admin. expenses 18,000
You are required to prepare a cost sheet for the month of April 2020 showing:
(i) Prime Cost
(ii) Works Cost
(iii) Cost of Production
(iv) Cost of Goods sold
(v) Cost of Sales and Profit earned.
Ans. Cost Sheet for the Month of April 2020
Particulars (`)
Opening stock of Raw Material 20,000
Add: Purchases [Refer Working Note-2] 1,65,000
Less: Closing stock of Raw Material (25,000)

Raw material consumed 1,60,000

Add: Direct labour cost 1,20,000
Prime cost 2,80,000
Add: Factory overheads 1,00,000
Gross Works cost 3,80,000
Add: Opening work-in-progress 20,000
Less: Closing work-in-progress (30,000)
Works Cost 3,70,000
Add: Opening stock of finished goods 50,000
Less: Closing stock of finished goods (60,000)
Cost of goods sold 3,60,000
Add: General and administration expenses* 18,000
Add: Selling expenses 22,000
Profit {Balancing figure (` 5,00,000 – ` 4,00,000)} 1,00,000
Sales 5,00,000
*General and administration expenses have been assumed as not relating to the production activity.
Working Note:
1. Computation of the raw material consumed
Particulars (`)
Less: General and administration expenses (18,000)
Less: Selling expenses (22,000)
Add: Closing stock of finished goods 60,000
Less: Opening stock of finished goods (50,000)
Cost of production/Gross works cost 3,70,000
Add: Closing stock of work-in-progress 30,000
Less: Opening stock of work-in-progress (20,000)
Works cost 3,80,000
Less: Factory overheads (1,00,000)
Prime cost 2,80,000

Less: Direct labour (1,20,000)
Raw material consumed 1,60,000

2. Computation of the raw material purchased

Particulars (`)
Closing stock of Raw Material 25,000
Add: Raw Material consumed 1,60,000
Less: Opening stock of Raw Material (20,000)
Raw Material purchased 1,65,000
Q-19 X Ltd. manufactures two types of pens ‘Super Pen’ and ‘Normal Pen’.
The cost data for the year ended 30th September, 2019 is as follows:
(` )
Production Overhead 1,92,000
Total 14,40,000
It is further ascertained that :
(1) Direct materials cost in Super Pen was twice as much of direct material in Normal Pen.
(2) Direct wages for Normal Pen were 60% of those for Super Pen.
(3) Production overhead per unit was at same rate for both the types.
(4) Administration overhead was 200% of direct labour for each.
(5) Selling cost was ‘ 1 per Super pen.
(6) Production and sales during the year were as follow :
Production Sales
No. of units No. of units
Super Pen 40,000 Super Pen 36,000
Normal Pen 1,20,000
(7) Selling price was ` 30 per unit for Super Pen.
Prepare a Cost Sheet for ‘Super Pen’ showing:
(i) Cost per unit and Total Cost
(ii) Profit per unit and Total Profit
Ans. Preparation of Cost Sheet for Super Pen
No. of units produced = 40,000 units
No. of units sold = 36,000 units
Particulars Per unit (`) Total (`)
Direct materials (Working note- (i)) 8.00 3,20,000
Direct wages (Working note- (ii)) 4.00 1,60,000
Prime cost 12.00 4,80,000
Production overhead (Working note- (iii)) 1.20 48,000
Factory Cost 13.20 5,28,000
Administration Overhead* (200% of direct wages) 8.00 3,20,000
Cost of production 21.20 8,48,000
Less: Closing stock (40,000 units – 36,000 units) - (84,800)
Cost of goods sold i.e. 36,000 units 21.20 7,63,200

Selling cost 1.00 36,000

Cost of sales/ Total cost 22.20 7,99,200
Profit 7.80 2,80,800
Sales value (` 30 × 36,000 units) 30.00 10,80,000
Working Notes:
(i) Direct material cost per unit of Normal pen = M
Direct material cost per unit of Super pen = 2M
Total Direct Material cost = 2M × 40,000 units + M × 1,20,000 units
Or, ` 8,00,000 = 80,000 M + 1,20,000 M
`8,00,000
Or, M = =`4
2,00,000
Therefore, Direct material Cost per unit of Super pen = 2 × ` 4 = ` 8
(ii) Direct wages per unit for Super pen = W
Direct wages per unit for Normal Pen = 0.6W
So, (W x 40,000) + (0.6W x 1,20,000) = ` 4,48,000
W = ` 4 per unit
`1,92,000
(iii) Production overhead per unit = = ‘ 1.20
(40,000+1,20,000)
Production overhead for Super pen = ` 1.20 × 40,000 units = ` 48,000
* Administration overhead is specific to the product as it is directly related to direct labour as mentioned in
the question and hence to be considered in cost of production only.
Assumption: It is assumed that in point (1) and (2) of the Question, direct materials cost and direct wages
respectively is related to per unit only.
Note: Direct Material and Direct wages can be calculated in alternative ways.
Q-20 Impact Ltd. provides you the following details of its expenditures for the year ended 31st March, 2021:
S.No. Particulars Amount (`) Amount (`)
(ii) GST paid under Composition scheme 10,00,000
(iii) Freight inwards 5,20,600
(iv) Trade discounts received 10,00,000
(v) Wages paid to factory workers 15,20,000
(vi) Contribution made towards employees’ PF & ESIS 1,90,000
(vii) Production bonus paid to factory workers 1,50,000
(viii) Fee for technical assistance 1,12,000
(ix) Amount paid for power & fuel 2,62,000
(x) Job charges paid to job workers 4,50,000
(xi) Stores and spares consumed 1,10,000
(xii) Depreciation on:

Factory building 64,000

Office building 46,000
Plant & Machinery 86,000 1,96,000
(xiii) Salary paid to supervisors 1,20,000
(xiv) Repairs & Maintenance paid for:
Plant & Machinery 58,000
Sales office building 50,000
Vehicles used by directors 20,600 1,28,600
(xv) Insurance premium paid for:
Plant & Machinery 31,200
Factory building 28,100 59,300
(xvi) Expenses paid for quality control check activities 25,000
(xvii) Research & development cost paid for
(xviii) Expenses paid for administration of factory work 1,38,000
(xix) Salary paid to functional mangers:
Production control 4,80,000
Finance & Accounts 9,60,000
Sales & Marketing 12,00,000 26,40,000
(xx) Salary paid to General Manager 13,20,000
(xxi) Packing cost paid for:
Primary packing necessary to maintain quality 1,06,000
For re-distribution of finished goods 1,12,000 2,18,000
(xxii) Interest and finance charges paid (for usage of non- equity fund) 3,50,000
(xxiii) Fee paid to auditors 1,80,000
(xxiv) Fee paid to legal advisors 1,20,000
(xxv) Fee paid to independent directors 2,40,000
(xxvi) Payment for maintenance of website for online sales 1,80,000
(xxvii) Performance bonus paid to sales staffs 2,40,000
(xxviii) Value of stock as on 1st April, 2020:
Raw materials 9,00,000
Work-in-process 4,00,000
Finished goods 7,00,000 20,00,000
(xxix) Value of stock as on 31st March, 2021:
Raw materials 5,60,000
Work-in-process 2,50,000
Finished goods 11,90,000 20,00,000
Amount realized by selling of waste generated during manufacturing process – ` 66,000/-

From the above data, you are required to PREPARE Statement of cost of Impact Ltd. for the year ended
31st March, 2021, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of Production, (iv) Cost of goods sold
and (v) Cost of sales.
Ans. Statement of Cost of Impact Ltd. for the year ended 31st March, 2021:
Sl.No. Particulars Amount (`) Amount (`)
Raw materials purchased 5,00,00,000
GST paid under Composition scheme* 10,00,000
Freight inwards 5,20,600
Less: Trade discounts received (10,00,000)
Wages paid to factory workers 15,20,000
Contribution made towards employees’ PF &
ESIS 1,90,000
Production bonus paid to factory workers 1,50,000 18,60,000
Fee for technical assistance 1,12,000
Amount paid for power & fuel 2,62,000
Job charges paid to job workers 4,50,000 8,24,000
Stores and spares consumed 1,10,000
Depreciation on factory building 64,000
Depreciation on plant & machinery 86,000
Repairs & Maintenance paid for plant & machinery 58,000
Insurance premium paid for factory building 28,100
Salary paid to supervisors 1,20,000 4,97,300
Expenses paid for quality control check activities 25,000
(vi) Research & development cost paid for
(vii) Administration cost related with production:
-Expenses paid for administration of factory work 1,38,000
-Salary paid to Production control manager 4,80,000 6,18,000
(viii) Less: Realisable value on sale of scrap and waste (66,000)

(ix) Add: Primary packing cost 1,06,000

(x) Administrative overheads:
Depreciation on office building 46,000
Repairs & Maintenance paid for vehicles used by directors 20,600
Salary paid to Manager- Finance & Accounts 9,60,000
Salary paid to General Manager 13,20,000
Fee paid to auditors 1,80,000
Fee paid to legal advisors 1,20,000
Fee paid to independent directors 2,40,000 28,86,600
(xi) Selling overheads:
Repairs & Maintenance paid for sales office building 50,000
Salary paid to Manager- Sales & Marketing 12,00,000
Payment for maintenance of website for online sales 1,80,000
Performance bonus paid to sales staffs 2,40,000 16,70,000
(xii) Packing cost paid for re-distribution of finished goods 1,12,000
(xiii) Interest and finance charges paid 3,50,000
* GST paid under Composition scheme would be included under cost of material as it is not eligible for
input tax credit.
Q-21 RTA Ltd. has the following expenditures for the year ended 31st December, 2020:
Sl.No. Amount (`) Amount (`)
(ii) Freight inward 9,20,600
(iii) Wages paid to factory workers 25,20,000
(iv) Royalty paid for production 1,80,000
(v) Amount paid for power & fuel 3,50,000
(vi) Job charges paid to job workers 3,10,000
(vii) Stores and spares consumed 1,10,000
(viii) Depreciation on office building 50,000
(ix) Repairs & Maintenance paid for:
- Sales office building 20,000 60,000
(x) Insurance premium paid for:
- Factory building 18,800 47,000
(xi) Expenses paid for quality control check activities 18,000
(xii) Research & development cost paid for 20,000

(xiii) Expenses paid for pollution control and 36,000

engineering & maintenance
(xiv) Salary paid to Sales & Marketing mangers 5,60,000
(xv) Salary paid to General Manager 6,40,000
(xvi) Packing cost paid for:
- Primary packing necessary to maintain quality 46,000
- For re-distribution of finished goods 80,000 1,26,000
(xvii) Fee paid to independent directors 1,20,000
(xviii) Performance bonus paid to sales staffs 1,20,000
(xix) Value of stock as on 1stJanuary, 2020:
- Finished goods 12,00,000 30,60,000
(xx) Value of stock as on 31stDecember, 2020:
- Finished goods 10,50,000 25,50,000
Amount realized by selling of scrap and waste generated during manufacturing process – ` 48,000/-
From the above data you are requested to PREPARE Statement of Cost for RTA Ltd. for the year ended
31st December, 2020, showing (i) Prime cost, (ii) Factory cost, (iii) Cost of Production, (iv) Cost of goods
sold and (v) Cost of sales.
Ans. Statement of Cost of RTA Ltd. for the year ended 31st December, 2020:
Sl.No. Particulars Amount (`) Amount (`)
- Raw materials purchased 5,00,00,000
- Freight inward 9,20,600
- Wages paid to factory workers 25,20,000
- Royalty paid for production 1,80,000
- Amount paid for power & fuel 3,50,000
- Job charges paid to job workers 3,10,000 8,40,000
- Stores and spares consumed 1,10,000
- Repairs & Maintenance paid for plant & machinery 40,000
- Insurance premium paid for plant & machinery 28,200
- Insurance premium paid for factory building 18,800
- Expenses paid for pollution control and
engineering & maintenance 36,000 2,33,000


- Expenses paid for quality control check activities 18,000
(vi) Research & development cost paid for
(vii) Less: Realisable value on sale of scrap and waste (48,000)
(viii) Add: Primary packing cost 46,000
(ix) Administrative overheads:
- Depreciation on office building 50,000
- Salary paid to General Manager 6,40,000
- Fee paid to independent directors 1,20,000 8,10,000
(x) Selling overheads:
- Repairs & Maintenance paid for sales office building 20,000
- Salary paid to Manager- Sales & Marketing 5,60,000
- Performance bonus paid to sales staffs 1,20,000 7,00,000
(xi) Distribution overheads:
- Packing cost paid for re-distribution of
finished goods 80,000
Q-22 A Ltd. produces a single product X. During the month of December 2021, the company has produced
14,560 tonnes of X. The details for the month of December 2021 are as follows:
(i) Materials consumed ` 15,00,000
(ii) Power consumed 13,000 Kwh @ ` 7 per Kwh
(iii) Diesels consumed 1,000 litres @ ` 93 per litre
(iv) Wages & salary paid – ` 64,00,000
(v) Gratuity & leave encashment paid – ` 44,20,000
(vi) Hiring charges paid for HEMM- ` 13,00,000
(vii) Hiring charges paid for cars used for official purpose – ` 80,000
(viii) Reimbursement of diesel cost for the cars – ` 20,000
(ix) The hiring of cars attracts GST under RCM @5% without credit.
(x) Maintenance cost paid for weighing bridge (used for weighing of final goods at the time of despatch)
– ` 7,000
(xi) AMC cost of CCTV installed at weighing bridge (used for weighing of final goods at the time of
despatch) and factory premises is ` 6,000 and ` 18,000 per month respectively.

(xii) TA/ DA and hotel bill paid for sales manager- ` 16,000
(xiii) The company has 180 employees works for 26 days in a month.
Required:
(a) PREPARE a Cost sheet for the month of December 2021.
(b) COMPUTE Earnings per manshift (EMS) and Output per manshift (OMS) for the month of December
2021.
Ans.
(a) Cost Sheet of A Ltd. for the month of December 2021
Wages & Salary 64,00,000
Gratuity & leave encashment 44,20,000 1,08,20,000
Power cost (13,000 kwh × ` 7) 91,000
Diesel cost (1,000 ltr × ` 93) 93,000 1,84,000
HEMM hiring charges 13,00,000
AMC cost of CCTV installed at factory premises 18,000
Cost of Production/ Cost of Goods Sold 1,38,22,000
Hiring charges of cars 80,000
Reimbursement of diesel cost 20,000
1,00,000
Add: GST @5% on RCM basis 5,000 1,05,000
Maintenance cost for weighing bridge 7,000
AMC cost of CCTV installed at weigh bridge 6,000 13,000
TA/ DA & hotel bill of sales manager 16,000
(b) Manshift = 180 employees × 26 days = 4,680 manshifts
Computation of earnings per manshift (EMS):
Total employee benefits paid
EMS =
Manshift
` 1, 08,20, 000
= = ` 2,312
4,680
Computation of Output per manshift (OMS):
Total Output / Production
Manshift
14, 560 Tonne

= 3.11 tonne
4, 680

Q-23 G Ltd. manufactures leather bags for office and school purposes.
The following information is related with the production of leather bags for the month of September,
2021.
(1) Leather sheets and cotton clothes are the main inputs and the estimated requirement per bag is
two metres of leather sheets and one metre of cotton cloth. 2,000 metre of leather sheets and
1,000 metre of cotton cloths are purchased at ` 3,20,000 and ` 15,000 respectively. Freight paid on
purchases is ` 8,500.
(2) Stitching and finishing need 2,000 man hours at ` 80 per hour.
(3) Other direct costs of ` 10 per labour hour is incurred.
(4) G Ltd. have 4 machines at a total cost of ` 22,00,000. Machines have a life of 10 years with a scrap
value of 10% of the original cost. Depreciation is charged on a straight-line method.
(5) The monthly cost of administration and sales office staffs are ` 45,000 and ` 72,000 respectively. G
Ltd. pays ` 1,20,000 per month as rent for a 2,400 sq. feet factory premises. The administrative and
sales office occupies 240 sq. feet and 200 sq. feet respectively of factory space.
(6) Freight paid on delivery of finished bags is ` 18,000.
(7) During the month, 35 kgs of scrap (cuttings of leather and cotton) are sold at ` 150 per kg.
(8) There are no opening and closing stocks of input materials. There is a finished stock of 100 bags in
stock at the end of the month.
You are required to prepare a cost sheet in respect of above for the month of September 2021 showing:
(i) Cost of Raw Material Consumed
(ii) Prime Cost
(iii) Works/Factory Cost
(iv) Cost of Production
(v) Cost of Goods Sold
(vi) Cost of Sales
Ans. No. of bags manufactured = 1,000 units
Cost sheet for the month of September 2021
Particulars Total Cost Cost per unit
(` ) (` )
- Leather sheets 3,20,000 320.00
- Cotton cloths 15,000 15.00
Add: Freight paid on purchase 8,500 8.50
(i) Cost of material consumed 3,43,500 343.50
2. Direct wages (`80 × 2,000 hours) 1,60,000 160.00
3. Direct expenses (`10 × 2,000 hours) 20,000 20.00
4. (ii) Prime Cost 5,23,500 523.50
5. Factory Overheads: Depreciation on machines 16,500 16.50
{(` 22,00,000 × 90%) ÷ 120 months}
Apportioned cost of factory rent 98,000 98.00
6. (iii) Works/ Factory Cost 6,38,000 638.00

7. Less: Realisable value of cuttings (`150×35 kg.) (5,250) (5.25)

8. (iv) Cost of Production 6,32,750 632.75
9. Add: Opening stock of bags 0
10. Less: Closing stock of bags (100 bags × `632.75) (63,275)
11. (v) Cost of Goods Sold 5,69,475 632.75
12. Add: Administrative Overheads:
- Apportioned rent for administrative office 12,000 13.33
13. Add: Selling and Distribution Overheads
- Apportioned rent for sales office 10,000 11.11
- Freight paid on delivery of bags 18,000 20.00
14. (vi) Cost of Sales 7,26,475 807.19
Apportionment of Factory rent:
To factory building {(` 1,20,000 ÷ 2400 sq. feet) × 1,960 sq. feet} = ` 98,000
To administrative office {(` 1,20,000 ÷ 2400 sq. feet) × 240 sq. feet} = ` 12,000
To sale office {(` 1,20,000 ÷ 2400 sq. feet) × 200 sq. feet} = ` 10,000
Q-24 Arnav Ltd. operates in beverages industry where it manufactures soft-drink in three sizes of Large (3
litres), Medium (1.5 litres) and Small (600 ml) bottles. The products are processed in batches. The 5,000
litres capacity processing plant consumes electricity of 90 Kilowatts per hour and a batch takes 1 hour
45 minutes to complete. Only symmetric size of products can be processed at a time. The machine set-
up takes 15 minutes to get ready for next batch processing. During the set-up, power consumption is
only 20%.
(I) The current price of Large, Medium and Small are ` 150, ` 90 and ` 50 respectively.
(II) To produce a litre of beverage, 14 litres of raw material-W and 25 ml of Material-C are required
which costs ` 0.50 and `1,000 per litre respectively.
(III) 20 direct workers are required. The workers are paid ` 880 for 8 hours shift of work.
(IV) The average packing cost per bottle is `3
(V) Power cost is ` 7 per Kilowatt -hour (Kwh)
(VI) Other variable cost is ` 30,000 per batch.
(VII) Fixed cost (Administration and marketing) is ` 4,90,00,000.
(VIII)The holding cost is ` 1 per bottle per annum.
The marketing team has surveyed the following demand (bottle) of products:
Large Medium Small
3,00,000 7,50,000 20,00,000
Required:
CALCULATE net profit/ loss of the organisation and also COMPUTE Economic Batch Quantity (EBQ).
Ans. Workings:
1. Maximum number of bottles that can be processed in a batch:
5, 000 ltrs
Bottle volume

Large Medium Small

Qty (ltr) Max bottles Qty (ltr) Max bottles Qty (ml) Max bottles
3 1,666 1.5 3,333 600 8,333
For simplicity of calculation small fractions has been ignored.
2. Number of batches to be run:
Large Medium Small Total
A Demand 3,00,000 7,50,000 20,00,000
B Bottles per batch (Refer WN-1) 1,666 3,333 8,333
C No. of batches [A÷B] 180 225 240 645
3. Quantity of Material-W and Material C required to meet demand:
Particulars Large Medium Small Total
A Demand (bottle) 3,00,000 7,50,000 20,00,000
B Qty per bottle (Litre) 3 1.5 0.6
C Output (Litre) [A×B] 9,00,000 11,25,000 12,00,000 32,25,000
D Material-W per litre of output (Litre) 14 14 14
E Material-W required (Litre) [C×D] 1,26,00,000 1,57,50,000 1,68,00,000 4,51,50,000
F Material-C required per litre of output (ml) 25 25 25
G Material-C required (Litre) [(C×F)÷1000] 22,500 28,125 30,000 80,625
4. No. of Man-shift required: Large Medium Small Total

A No. of batches 180 225 240 645
B Hours required per batch (Hours) 2 2 2
C Total hours required (Hours) [A×B] 360 450 480 1,290
D No. of shifts required [C÷8] 45 57 60 162
E Total manshift [D×20 workers] 900 1,140 1,200 3,240
5. Power consumption in Kwh
Large Medium Small Total
For processing
A No. of batches 180 225 240 645
B Hours required per batch (Hours) 1.75 1.75 1.75 1.75
C Total hours required (Hours) [A×B] 315 393.75 420 1,128.75
D Power consumption per hour (Kwh) 90 90 90 90
E Total Power consumption (Kwh) [C×D] 28,350 35,437.5 37,800 1,01,587
F Per batch consumption* (Kwh) [E÷A] 157.5 157.5 157.5 157.5

For set-up
G Hours required per batch (Hours) 0.25 0.25 0.25 0.25
H Total hours required (Hours) [A×G] 45 56.25 60 161.25
I Power consumption per hour (Kwh) [20%×90] 18 18 18 18
J Total Power consumption (Kwh) [H×I] 810 1,012.5 1,080 2,902.5
K Per batch consumption* (Kwh) [J÷A] 4.5 4.5 4.5 4.5
* Per batch consumption can be directly calculated as [Hours required per batch x Power consumption per
hour]
Calculation of Profit/ loss per batch:
Particulars Large Medium Small Total
A Demand (bottle) 3,00,000 7,50,000 20,00,000 30,50,000
B Price per bottle (`) 150 90 50
C Sales value (`) [A×B] 4,50,00,000 6,75,00,000 10,00,00,000 21,25,00,000
Direct Material cost:
E Material-W (`)
[Qty in WN-3 × `0.50] 63,00,000 78,75,000 84,00,000 2,25,75,000
F Material-C (`)
[Qty in WN-3 × `1,000] 2,25,00,000 2,81,25,000 3,00,00,000 8,06,25,000
G [E+F] 2,88,00,000 3,60,00,000 3,84,00,000 10,32,00,000
H Direct Wages (`)
[Man-shift in WN-4 × × `880] 7,92,000 10,03,200 10,56,000 28,51,200
I Packing cost (`) [A×`3] 9,00,000 22,50,000 60,00,000 91,50,000
Power cost (`)
J For processing (`)
[WN-5 × `7] 1,98,450 2,48,062.5 2,64,600 7,11,112.5
K For set-up time (`) [WN-5 × `7] 5,670 7,087.5 7,560 20,317.5
L [J+K] 2,04,120 2,55,150 2,72,160 7,31,430
M Other variable cost (`)
[No. of batch in WN-2 × `30,000]54,00,000 67,50,000 72,00,000 1,93,50,000
N Total Variable cost per batch
[G+H+I+L+M] 3,60,96,120 4,62,58,350 5,29,28,160 13,52,82,630
O Profit/ loss before
fixed cost [C-N] 89,03,880 2,12,41,650 4,70,71,840 7,72,17,370
P Fixed Cost 4,90,00,000
Q Net Profit [O-P] 2,82,17,370
Computation of Economic Batch Quantity (EBQ):

D = Annual Demand for the Product = Refer A below

S = Set-up cost per batch = Refer D below
C = Carrying cost per unit per annum =Refer E below
Particulars Large Medium Small
A Annual Demand (bottle) 3,00,000 7,50,000 20,00,000
B Power cost for set-up time (`)
[Consumption per batch in WN-5 × `7] 31.50 31.50 31.50
C Other variable cost (`) 30,000 30,000 30,000
D Total Set-up cost [B+C] 30,031.50 30,031.50 30,031.50
E Holding cost: 1.00 1.00 1.00
F EBQ (Bottle) 1,34,234 2,12,243 3,46,592
Q-25 The following data relates to manufacturing of a standard product during the month of February, 2022:
Particulars Amount (in `)
Stock of Raw material as on 01-02-2022 1,20,000
Work in Progress as on 01-02-2022 75,000
Purchase of Raw material 3,00,000
Carriage Inwards 30,000
Cost of special drawing 45,000
Hire charges paid for Plant (Direct) 36,000
Return of Raw Material 60,000
Carriage on return 9,000
Expenses for participation in Industrial exhibition 12,000
Maintenance of office building 3,000
Salary to office staff 37,500
Legal charges 3,750
Depreciation on Delivery van 9,000
Warehousing charges 2,250
Stock of Raw material as on 28-02-2022 45,000
Stock of Work in Progress as on 28-02-2022 36,000
• Store overheads on materials are 10% of material consumed.
• Factory overheads are 20% of the Prime cost.
• 10% of the output was rejected and a sum of ` 7,500 was realized on sale of scrap.
• 10% of the finished product was found to be defective and the defective products were rectified
at an additional expenditure which is equivalent to 20% of proportionate direct wages.
• The total output was 8,000 units during the month.
You are required to PREPARE a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed.

(ii) Prime Cost

(iii) Work Cost
(v) Cost of Sales
Ans. Statement of Cost for the month of February, 2022
(i) Cost of Material Consumed:
Raw materials purchased (` 3,00,000 – ` 60,000) 2,40,000
Carriage inwards 30,000
Less: Closing stock of raw materials (45,000) 3,45,000
Direct expenses:
Hire charges paid for Plant (Direct) 36,000 81,000
(ii) Prime Cost 6,06,000
Store overheads (10% of material consumed) 34,500
Factory overheads (20% of Prime cost) 1,21,200
Additional expenditure for rectification of defective products
(refer working note) 3,240 1,67,940
Gross factory cost 7,73,940
Add: Opening value of W-I-P 75,000
Less: Closing value of W-I-P (36,000)
(iii) Works/ Factory Cost 8,12,940
Less: Realisable value on sale of scrap (7,500)
(iv) Cost of Production 8,05,440
Add: Opening stock of finished goods -
Less: Closing stock of finished goods - _______
Salary paid to Office staff 37,500
Legal Charges 3,750 44,250
Selling overheads:
Expenses for participation in Industrial exhibition 12,000 12,000
Distribution overheads:
Depreciation on delivery van 9,000
Warehousing charges 2,250 11,250
(v) Cost of Sales 8,72,940

Working Notes:
1. Number of Rectified units
Total Output 8,000 units
Less: Rejected 10% 800 units
Finished product 7,200 units
Rectified units (10% of finished product) 720 units
2. Proportionate additional expenditure on 720 units
= 20% of proportionate direct wages
= 0.20 x (` 1,80,000/8,000) x 720
= ` 3,240
---0---0---

CHAPTER - 7
COST ACCOUNTING SYSTEM (Integral and Non-Integral)
Q-1 The following are the balances existed in the books of JPG Ltd. for the year ended, 31st March, 2019:
Particulars Dr. Cr.
(` ) (` )
Stores Ledger Control A/c 30,00,000
WIP Control A/c 15,00,000
Finished Goods Control A/c 25,00,000
Manufacturing Overheads Control A/c 1,50,000
Cost Ledger Control A/c 68,50,000
During the year 2019-20, the following transactions took place:
Finished product (at cost) 22,50,000
Manufacturing Overhead incurred 8,50,000
Raw material purchased 12,50,000
Factory wages 4,00,000
Materials issued to production 13,50,000
Sales returned (at cost) 90,000
Material returned to suppliers 1,30,000
Manufacturing overhead charged to production 8,50,000
Required:
PREPARE the following control accounts and Trial balance at the end of the year:
Cost Ledger, Stores Ledger, Work-in-process, Finished Stock, Manufacturing Overhead, Wages and Cost
of Sales.
Ans. Cost Ledger Control Account
Particulars (` ) Particulars (`)
To Stores Ledger control A/c 1,30,000 By Balance b/d 68,50,000
To Costing Profit & Loss A/c 17,10,000 By Stores Ledger control A/c 12,50,000
By Wages Control A/c 6,00,000
To Balance c/d 77,10,000 By Manufacturing overhead control A/c 8,50,000
95,50,000 95,50,000

Store Ledger Control Account

Particulars (` ) Particulars (` )
To Balance b/d 30,00,000 By WIP Control A/c 13,50,000
To Cost Ledger control A/c 12,50,000 By Cost Ledger control A/c (return) 1,30,000
________ By Balance c/d 27,70,000
42,50,000 42,50,000
WIP Control Account
To Balance b/d 15,00,000 By Finished Stock Control A/c 22,50,000
To Wages Control A/c 4,00,000
To Stores Ledger control A/c 13,50,000
To Manufacturing overhead
control A/c 8,50,000 By Balance c/d 18,50,000
41,00,000 41,00,000
Finished Stock Control Account
To Balance b/d 25,00,000 By Cost of Sales A/c 17,50,000
To WIP Control A/c 22,50,000
To Cost of Sales A/c (sales return) 90,000 By Balance c/d 30,90,000
48,40,000 48,40,000
Manufacturing Overhead Control Account
To Cost Ledger Control A/c 8,50,000 By Balance b/d 1,50,000
To Wages Control A/c 2,00,000 By WIP Control A/c 8,50,000
________ By Costing P&L A/c (under recovery) 50,000
10,50,000 10,50,000
Wages Control Account Particulars (` ) Particulars (` )
To Cost Ledger Control A/c 6,00,000 By WIP Control A/c 4,00,000
_______ By Manufacturing overhead control A/c 2,00,000
6,00,000 6,00,000
Cost of Sales Account
To Finished Stock Control A/c 17,50,000 By Finished Stock Control A/c
(sales return) 90,000
_______ By Costing Profit & Loss A/c 16,60,000
17,50,000 17,50,000
-222- Chapter-7 : Cost Accounting System

Trial Balance
Particulars Dr. Cr.
(` ) (` )
Cost Ledger Control A/c _______ 77,10,000
77,10,000 77,10,000
Working:
Costing P&L Account
To Cost of Sales A/c 16,60,000 By Cost Ledger control A/c 17,10,000
To Manufacturing overhead control A/c 50,000 _______
17,10,000 17,10,000
Q-2 As of 30th September, 2019, the following balances existed in a firm’s cost ledger, which is maintained
separately on a double entry basis:
Debit(`) Credit(`)
Stores Ledger Control A/c 15,00,000 _
Work-in-progress Control A/c 7,50,000 _
Finished Goods Control A/c 12,50,000 _
Manufacturing Overhead Control A/c _ 75,000
35,00,000 35,00,000
During the next quarter, the following items arose:
(` )
Finished Product (at cost) 11,25,000
Manufacturing overhead incurred 4,25,000
Factory wages 2,00,000
Materials returned to suppliers 65,000
Manufacturing overhead charged to production 4,25,000
Required:
PREPARE the Cost Ledger Control A/c, Stores Ledger Control A/c, Work-in-progress Control A/c, Finished
Stock Ledger Control A/c, Manufacturing Overhead Control A/c , Wages Control A/c, Cost of Sales A/c
and the Trial Balance at the end of the quarter.


Dr. Cr.
(` ) (` )
To Store LedgerControl A/c 65,000 By Opening Balance 34,25,000
To Balance c/d 47,10,000 By Store ledger control A/c 6,25,000
By ManufacturingOverhead
Control A/c 4,25,000
_________ By Wages Control A/c 3,00,000
47,75,000 47,75,000
Stores Ledger Control Account
Dr. Cr.
(` ) (` )
To Opening Balance 15,00,000 By WIP Control A/c 6,75,000
To Cost ledger control A/c 6,25,000 By Cost ledger controlA/c (Returns) 65,000
________ By Balance c/d 13,85,000
21,25,000 21,25,000
WIP Control Account
Dr. Cr.
(` ) (` )
To Opening Balance 7,50,000 By Finished Stock Ledger
To Wages Control A/c 2,00,000 By Balance c/d 9,25,000
To Stores Ledger Control A/c 6,75,000
To Manufacturing
Overhead Control A/c 4,25,000 _______
20,50,000 20,50,000
Finished Stock Ledger Control Account
Dr. Cr.
(` ) (` )
To Opening Balance 12,50,000 By Cost of Sales 8,75,000
To WIP Control A/c 11,25,000 By Balance c/d 15,45,000
To Cost of Sales A/c (SalesReturn) 45,000 ________
24,20,000 24,20,000
Dr. Cr.
(` ) (` )
To Cost Ledger Control A/c 4,25,000 By Opening Balance 75,000
To Wages Control A/c 1,00,000 By WIP Control A/c 4,25,000
_______ By Under recoveryc/d 25,000
5,25,000 5,25,000

Wages Control Account

Dr. Cr.
(` ) (` )
To Transfer to Cost Ledger
Control A/c 3,00,000 By WIP Control A/c 2,00,000
By Manufacturing
_______ Overhead Control A/c 1,00,000
3,00,000 3,00,000
Dr. Cr.
(` ) (` )
To Finished Stock Ledger
Control A/c 8,75,000 By Finished Stock Ledger
Control A/c (Salesreturn) 45,000
_______ By Balance c/d 8,30,000
8,75,000 8,75,000
Trial Balance
(` ) (` )
Finished Stock Ledger Control A/c 15,45,000
Manufacturing Overhead Control A/c 25,000
Cost of Sales A/c 8,30,000
Cost ledger control A/c _______ 47,10,000
47,10,000 47,10,000
Q-3 The following is the summarised Trading and Profit and Loss Account of XYZ Ltd. for the year ended 31st
March 2019:
Particulars Amount (`) Particulars Amount (`)
Direct Material 14,16,000 Sales (30,000 units) 30,00,000
Direct wages 7,42,000 Finished stock (2,000 units) 1,67,500
Works overheads 4,26,000 Work-in-progress:
Administration overheads 1,50,000 - Materials 34,000
Selling and distribution overheads 1,65,000 - Wages 16,000
Net profit for the year 3,22,500 - Works overhead 4,000 54,000
32,21,500 32,21,500
The company’s cost records show that in course of manufacturing a standard unit (i) works overheads
have been charged @ 20% on pri me cost, (ii) administration overheads are related with production
activities and are recovered at ` 5 per finished unit, and (iii) selling and distribution overheads are
recovered at ` 6 per unit sold.

You are required to PREPARE:

(i) Costing Profit and Loss Account indicating the net profits,
(ii) A Statement showing reconciliation between profit as disclosed by the Cost Accounts and Financial
Accounts.
Ans.
(i) Costing Profit and Loss Account for the year ended 31st March 2019:
Material consumed 14,16,000 Sales (30,000 units) 30,00,000
Works overheads 4,31,600
(20% of Prime cost) 25,89,600
Less: Work in progress (54,000)
Administration overheads 1,60,000
(`5 × 32,000 units)
Cost of production 26,95,600
Less: Finished stock (1,68,475)
Selling and distribution 1,80,000
overheads (`6 × 30,000 unit)
30,00,000 30,00,000
(ii) Statement reconciling the profit as per costing profit and loss account with the profit as per financial
accounts
Profit as per cost records 2,92,875
Add: Overheads over-absorbed:
- Works overheads (` 4,31,600 – ` 4,26,000) 5,600
- Administration OH (` 1,60,000 – ` 1,50,000) 10,000
- Selling and Distribution (` 1,80,000 – ` 1,65,000) 15,000 30,600
Less: Closing stock overvalued (` 1,68,475 – ` 1,67,500) ___(975)
Profit as per financial accounts 3,22,500
*It is assumed that the number of units Produced
= Number of units sold + Finished stock = 30,000 + 2,000 = 32,000 units.

Q-4 The financial books of a company reveal the following data for the year ended 31st March, 20X8:
Opening Stock: (` )
Finished goods 625 units 53,125
Work-in-process 46,000
01.04.20X7 to 31.03.20X8
Direct Labour 6,10,000
Factory overheads 4,22,000
Administration overheads (Production related) 1,98,000
Dividend paid 1,22,000
Bad Debts 18,000
Selling and Distribution Overheads 72,000
Interest received 38,000
Rent received 46,000
Sales 12,615 units 22,80,000
Closing Stock: Finished goods 415 units 45,650
The cost records provide as under:
• Factory overheads are absorbed at 70% of direct wages.
• Administration overheads are recovered at 15% of factory cost.
• Selling and distribution overheads are charged at ` 3 per unit sold.
• Opening Stock of finished goods is valued at ` 120 per unit.
• The company values work-in-process at factory cost for both Financial and Cost Profit Reporting.
Required:
(i) PREPARE a statements for the year ended 31st March, 20X8. Show
• the profit as per financial records
• the profit as per costing records.
(ii) PREPARE a statement reconciling the profit as per costing records with the profit as per Financial
Records.
Ans.
(i) Statement of Profit as per Financial records
(for the year ended March 31, 20X8)
(` ) (` )
To Opening stock of Finished Goods 53,125 By Sales 22,80,000
To Work-in-process 46,000 By Closing stock of finished Goods 45,650
To Raw materials consumed 8,40,000 By Work-in-Process 41,200
To Direct labour 6,10,000 By Rent received 46,000
To Factory overheads 4,22,000 By Interest received 38,000
To Administration overheads 1,98,000 To Selling & distribution overheads 72,000
To Dividend paid 1,22,000
To Bad debts 18,000 To Profit 69,725
24,50,850 24,50,850

Statement of Profit as per Costing records

(for the year ended March 31,20X8) (`)
Sales revenue (A)
(12,615 units) 22,80,000
Cost of sales:
Opening stock 75,000
(625 units × ` 120)
Add: Cost of production of 12,405 units 21,63,350
(Refer to working note 2)
Less: Closing stock (`174.39 × 415 units) (72,372)
Cost of goods sold (12,615 units) 21,65,978
Selling & distribution overheads
(12,615 units ×` 3) 37,845
Cost of sales: (B) 22,03,823
Profit: {(A) – (B)} 76,177
(ii) Statement of Reconciliation
(Reconciling the profit as per costing records with the profit as per financial records)
(`) (`)
Profit as per Cost Accounts 76,177
Add: Administration overheads over absorbed 83,550
(` 2,81,550 – ` 1,98,000)
Opening stock overvalued 21,875
(` 75,000 – ` 53,125)
Factory overheads over recovered 5,000 1,94,425
(` 4,27,000 – ` 4,22,000) 2,70,602
Less: Selling & distribution overheads under recovery 34,155
(` 72,000 – ` 37,845)
Closing stock overvalued (` 72,372 – ` 45,650) 26,722
Dividend 1,22,000
Bad debts 18,000 (2,00,877)
Profit as per financial accounts 69,725
Working notes:
1. Number of units produced Units
Sales 12,615
Add: Closing stock 415
Total 13,030
Less: Opening stock (625)
Number of units produced 12,405

2. Cost Sheet (` )
Direct labour 6,10,000
(70% of direct wages)
Add: Opening work-in-process 46,000
Less: Closing work-in-process 41,200
Factory cost of goods produced 18,81,800
(15% of factory cost)
Cost of production of 12,405 units 21,63,350
Cost of production per unit:
Total Cost of Production `21,63,350
= = = ` 174.39
No. of units produced 12,405 units
Q-5 As of 31st March, 2018, the following balances existed in a firm’s cost ledger, which is maintained
separately on a double entry basis:
Debit (`) Credit (`)
Stores Ledger Control A/c 3,20,000 -
Work-in-process Control A/c 1,52,000 -
Finished Goods Control A/c 2,56,000 -
Manufacturing Overhead Control A/c - 28,000
Cost Ledger Control A/c - 7,00,000
7,28,000 7,28,000
During the next quarter, the following items arose:
(` )
Finished Product (at cost) 2,35,500
Manufacturing overhead incurred 91,000
Factory wages 48,000
Indirect labour 20,600
Manufacturing overhead charged to production 86,000
Required:
PREPARE the Cost Ledger Control A/c, Stores Ledger Control A/c, Work-in-process Control A/c, Finished
Stock Ledger Control A/c, Manufacturing Overhead Control A/c, Wages Control A/c, Cost of Sales A/c and the
Trial Balance at the end of the quarter as per costing records.


Particulars (`) Particulars (`)
To Store Ledger Control A/c 11,000 By Opening Balance 7,00,000
To Balance c/d 9,84,600 By Store ledger control A/c 1,36,000
By Manufacturing Overhead Control A/c 91,000 By Wages Control A/c 68,600
9,95,600 9,95,600
To Opening Balance 3,20,000 By WIP Control A/c 1,26,000
To Cost ledger control A/c 1,36,000 By Cost ledger control A/c (Returns) 11,000
By Balance c/d 3,19,000
4,56,000 4,56,000
WIP Control Account
To Opening Balance 1,52,000 By Finished Stock Ledger
To Wages Control A/c 48,000 By Balance c/d 1,76,500
To Stores Ledger Control A/c 1,26,000
To Manufacturing Overhead
Control A/c 86,000 _______
4,12,000 4,12,000
Finished Stock Ledger Control Account
To Opening Balance 2,56,000 By Cost of Sales 1,68,000
To WIP Control A/c 2,35,500 By Balance c/d 3,31,500
To Cost of Sales A/c (Sales Return) 8,000 ______
4,99,500 4,99,500
To Cost Ledger Control A/c 91,000 By Opening Balance 28,000
To Wages Control A/c 20,600 By WIP Control A/c 86,000
To Over recovery c/d 2,400 ________
1,14,000 1,14,000
To Transfer to Cost Ledger 68,600 By WIP Control A/c 48,000
Control A/c
By Manufacturing Overhead 20,600
______ Control A/c ______
68,600 68,600


To Finished Stock Ledger
Control A/c 1,68,000 By Finished Stock Ledger 8,000
Control A/c (Sales return)
By Balance c/d 1,60,000 _______
1,68,000 1,68,000
Trial Balance
(` ) (`)
Finished Stock Ledger Control A/c 3,31,500
Manufacturing Overhead Control A/c -- 2,400
Cost of Sales A/c 1,60,000
Cost ledger control A/c -- 9,84,600
9,87,000 9,87,000
Q-6 Journalise the following transactions, in cost books under Non- Integrated system of Accounting.
(i) Credit Purchase of Material ` 27,000
(ii) Manufacturing overhead charged to Production ` 6,000
(iii) Selling and Distribution overheads recovered from Sales ` 4,000
(iv) Indirect wages incurred ` 8,000
(v) Material returned from production to stores ` 9,000
Ans. Journal entries are as follows:
Dr. Cr.
(` ) (` )
(i) Stores Ledger Control A/c…………………… Dr. 27,000
To Cost Ledger Control A/c 27,000
(ii) Work-in-Process Control A/c........................... Dr. 6,000
To Manufacturing Overhead Control A/c 6,000
(iii) Cost of Sales A/c……………………………… Dr. 4,000
To Selling & Dist. Overhead Control A/c 4,000
(iv) (1) Wage Control A/c…………………… Dr. 8,000
To Cost Ledger Control A/c 8,000
(2) Manufacturing Overhead Control A/c……… Dr. 8,000
To Wages Control A/c 8,000
OR
Manufacturing Overhead Control A/c……………. Dr.
To Cost Ledger Control A/c 8,000 8,000
(v) Stores Ledger Control A/c ……………………… Dr. 9,000
To Work-in-Process Control A/c 9,000
*Cost Ledger Control A/c is also known as General Ledger Control A/c

Q-7 Explain integrated accounting system and state its advantages.

Ans. Integrated Accounting System: Integrated Accounts is the name given to a system of accounting, whereby
cost and financial accounts are kept in the same set of books.
Obviously, then there will be no separate sets of books for Costing and Financial records.
Integrated accounts provide or meet out fully the information requirement for Costing as well as for
Financial Accounts. For Costing it provides information useful for ascertaining the cost of each product,
job, and process, operation of any other identifiable activity and for carrying necessary analysis.
Integrated accounts provide relevant information which is necessary for preparing profit and loss
account and the balance sheets as per the requirement of law and also helps in exercising effective
control over the liabilities and assets of its business.
Advantages of Integrated Accounting System
The main advantages of Integrated Accounts are as follows:
(i) No need for Reconciliation - The question of reconciling costing profit and financial profit does
not arise, as there is only one figure of profit.
(ii) Less efforts - Due to use of one set of books, there is a significant saving in effortsmade.
(iii) Less time consuming - No delay is caused in obtaining information as it is provided from books of
original entry.
(iv) Economical process - It is economical also as it is based on the concept of “Centralisation of
Accounting function”.
Q-8 M/s Abid Private Limited disclosed a net profit of ` 48,408 as per cost books for the year ending 31st
March 2019. However, financial accounts disclosed net loss of ` 15,000 for the same period. On
scrutinizing both the set of books of accounts, the following information was revealed:
Works Overheads under-recovered in Cost Books 48,600
Office Overheads over-recovered in Cost Books 11,500
Dividend received on Shares 17,475
Interest on Fixed Deposits 21,650
Provision for doubtful debts 17,800
Obsolescence loss not charged in Cost Accounts 17,200
Stores adjustments (debited in Financial Accounts) 35,433
Depreciation charged in financial accounts 30,000
Depreciation recovered in Cost Books 35,000
Prepare a Memorandum Reconciliation Account.
Ans. Memorandum Reconciliation Account
Dr. Cr.
To Works overheads under recovered By Net profit as per Costing books 48,408
in Cost Accounts 48,600 By Office overheads overrecovered
To Provision for doubtful debts 17,800 in cost accounts 11,500
To Obsolescence loss 17,200 By Dividend received onshares 17,475
To Store adjustment (Debit) 35,433 By Interest on fixed deposit 21,650
By Depreciation overcharged 5,000
By Net loss as per financial accounts 15,000
1,19,033 1,19,033
[Note: This question may also be solved by taking net loss as per financial accounts as basis.]

Q-9 The following balances were extracted from a Company's ledger as on 30th June, 2018:
Particulars Debit (`) Credit (`)
Raw material control a/c 2,82,450
Work-in-progress control a/c 2,38,300
Finished stock control a/c 3,92,500
General ledger adjustment a/c 9,13,250
Total 9,13,250 9,13,250
The following transactions took place during the quarter ended 30th September, 2018:
`
(i) Factory overheads - allocated to work-in-progress 1,36,350
(ii) Goods furnished - at cost 13,76,200
(iii) Raw materials purchased 12,43,810
(iv) Direct wages - allocated to work-in-progress 2,56,800
(v) Cost of goods sold 14,56,500
(vi) Raw materials - issued to production 13,60,430
(vii) Raw materials - credited by suppliers 27,200
(viii) Raw materials losses - inventory audit 6,000
(ix) Work-in-progress rejected (with no scrap value) 12,300
(x) Customer's returns (at cost) of finished goods 45,900
You are required to prepare:
(i) Raw material control a/c
(ii) Work-in-progress control a/c
(iii) Finished stock control a/c
(iv) General ledger adjustment a/c
Ans.
(i) Raw Material Control A/c
(`) (`)
To Balance b/d 2,82,450 By General Ledger Adjustment A/c 27,200
” General Ledger
Adjustment A/c 12,43,810 ” Work-in-progress Control A/c 13,60,430
Costing P & L A/c 6,000
(Loss) (OR GLA)
________ ” Balance c/d 1,32,630
15,26,260 15,26,260
(ii) Work-in-Progress Control A/c
(`) (`)
To Balance b/d 2,38,300
” Raw Material Control A/c 13,60,430 ” Finished Goods Control A/c 13,76,200
” Wages Control A/c 2,56,800 Costing P&L A/c (OR GLA) 12,300
” Factory OH Control A/c 1,36,350 ” Balance c/d 6,03,380
19,91,880 19,91,880

(iii) Finished Goods Control A/c

(`) (`)
To Balance b/d 3,92,500 By Cost of goods sold 14,56,500
A/c (OR GLA)
General Ledger 45,900
Adjustment A/c
” Work-in-process 13,76,200 ” Balance c/d 3,58,100
Control A/c ________ ________
18,14,600 18,14,600
(iv) General Ledger Adjustment A/c
(`) (`)
To Costing P&L A/c (sales) 25,68,910 By Balance b/d 9,13,250
(Balancing figure)
” Raw Material Control A/c 27,200 ” Raw Material Control A/c 12,43,810
” Wages Control A/c 2,56,800
” Factory OH Control A/c 1,36,350
________ ” Finished Goods Control A/c 45,900
25,96,110 25,96,110
OR
General ledger adjustment account
(`) (`)
To Raw Material Control A/c 27,200 By Balance b/d 9,13,250
” Raw Material control 6,000 ” Raw Material Control A/c 12,43,810
account(loss)
‘’ WIP control Account (rejection) 12,300 ” Wages Control A/c 2,56,800
“ Finished stock Control Account 14,56,500 ” Factory OH Control A/c 1,36,350
“” Balance c/d 10,94,110 ” Finished Goods Control A/c 45,900
25,96,110 25,96,110
Working:
Factory Overhead Control A/c
(`) (`)
To General Ledger 1,36,350 By Work-in-progress A/c 1,36,350
Adjustment A/c _______ _______
1,36,350 1,36,350
Q-10 GK Ltd. showed net loss of ` 2,43,300 as per their financial accounts for the year ended 31st March,
2018. However, cost accounts disclosed net loss of ` 2,48,300 for the same period. On scrutinizing both
the set of books of accounts, the following information were revealed:
`
(i) Works overheads over recovered 30,400 30,000
(ii) Selling overheads under recovered 20,300
(iii) Administrative overheads under recovered 27,700
(iv) Depreciation over charged in cost accounts 35,100
(v) Bad debts w/off in financial accounts 15,000
(vi) Preliminary Exp. w/off in financial accounts 5,000
(vii) Interest credited during the year in financial accounts 7,500

Prepare a reconciliation statement reconciling losses shown by financial and cost accounts by taking costing
net loss as base.
Ans. Reconciliation Statement
Particulars ` `
Loss as per Cost Accounts (2,48,300)
Add: Works overheads over recovered 30,400
Depreciation over charged in cost accounts 35,100
Interest credited during the year in financial accounts 7,500 73,000
Less: Selling overheads under recovered 20,300
Administrative overheads under recovered 27,700
Bad debts w/off in financial accounts 15,000
Preliminary Exp. w/off in financial accounts 5,000 (68,000)
Loss as per Financial Accounts (2,43,300)
Q-11 A manufacturing company disclosed a net loss of Rs.3,47,000 as per their cost accounts for the year
ended March 31,20X8. T he financial accounts h owever disclosed a net loss of Rs. 5,10,000 for the same
period. T he following information was revealed as a result of scrutiny of the figures of both the sets of
accounts.
(Rs.)
(i) Factory Overheads under-absorbed 40,000
(ii) Administration Overheads over-absorbed 60,000
(iii) Depreciation charged in Financial Accounts 3,25,000
(iv) Depreciation charged in Cost Accounts 2,75,000
(v) Interest on investments not included in Cost Accounts 96,000
(vi) Income-tax provided 54,000
(vii) Interest on loan funds in Financial Accounts 2,45,000
(viii) Transfer fees (credit in financial books) 24,000
(ix) Stores adjustment (credit in financial books) 14,000
(x) Dividend received 32,000
PREPARE a memorandum Reconciliation Account.
Ans. Memorandum Reconciliation Accounts
Dr. Cr.
(Rs.) (Rs.)
To Net Loss as per Costing books 3,47,000 By Administration overheads over
recovered in cost accounts 60,000
To Factory overheads under 40,000 By Interest on investment not included in
absorbed in Cost Accounts Cost Accounts 96,000
To Depreciation under charged in
Cost Accounts 50,000 By Transfer fees in Financial books 24,000
To Income- Tax not provided in
Cost Accounts 54,000 By Stores adjustment
(Credit in financial books) 14,000

To Interest on Loan Funds in

Financial Accounts 2,45,000 By Dividend received in financial books 32,000
By Net loss as per Financial books 5,10,00
_______ 0
7,36,000 7,36,00
0
Q-12 “Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting
system?” EXPLAIN.
Ans. In integrated accounting system cost and financial accounts are kept in the same set of books.
Such a system will have to afford full information required for Costing as well as for Financial Accounts.
In other words, information and data should be recorded in such a way so as to enable the firm to
ascertain the cost (together with the necessary analysis) of each product, job, process, operation or
any other identifiable activity. It also ensures the ascertainment of marginal cost, variances, abnormal
losses and gains. In fact all information that management requires from a system of Costing for doing
its work properly is made available. T he integrated accounts give full information in such a manner so
that the profit and loss account and the balance sheet can be prepared according to the requirements
of law and the management maintains full control over the liabilities and assets of its business.
Since, only one set of books are kept for both cost accounting and fin ancial accounting purpose so
there is no necessity of reconciliation of cost and financial accounts.
Q-13 R Limited showed a net loss of Rs.35,400 as per their cost accounts for the year ended 31st March, 20X8.
However, the financial accounts disclosed a net profit of Rs.67,800 for the same period. T he following
information were revealed as a result of scrutiny of the figures of cost accounts and financial accounts:
(Rs.) (Rs.)
(i) Administrative overhead under recovered 25,500
(ii) Factory overhead over recovered 1,35,000
(iii) Depreciation under charged in Cost Accounts 26,000
(iv) Dividend received 20,000
(v) Loss due to obsolescence charged in Financial Accounts 16,800
(vi) Income tax provided 43,600
(vii) Bank interest credited in Financial Accounts 13,600
(viii) Value of opening stock:
- In Cost Accounts 1,65,000
- In Financial Accounts 1,45,000
(ix) Value of closing stock:
- In Cost Accounts 1,25,500
- In Financial Accounts 1,32,000
(x) Goodwill written-off in Financial Accounts 25,000
(xi) Notional rent of own premises charged in Cost Accounts 60,000
(xii) Provision for doubtful debts in Financial Accounts 15,000
PREPARE a reconciliation sta tement by taking costing net loss as base.

Ans. Statement of Reconciliation

Sl. No. Particulars Amount (Rs.) Amount (Rs.)
Net loss as per Cost Accounts (35,400)
Additions
1. Factory O/H over recovered 1,35,000
2. Dividend Received 20,000
3. Bank Interest received 13,600
4. Difference in Value of Opening Stock 20,000
(1,65,000 – 1,45,000)
5. Difference in Value of Closing Stock 6,500
(1,32,000 – 1,25,500)
6. Notional Rent of own Premises 60,000 2,55,100
Deductions
1. Administration O/H under recovered 25,500
2. Depreciation under charged 26,000
3. Loss due to obsolescence 16,800
4. Income tax Provided 43,600
5. Goodwill written-off 25,000
6. Provision for doubtful debts 15,000 (1,51,900)
Net Profit as per Financial A/c. 67,800
Q-14 Following information have been extracted from the cost records of XYZ Pvt. Ltd.
Stores: (` )
Opening balance 1,08,000
Purchases 5,76,000
Transfer from WIP 2,88,000
Issue to WIP 5,76,000
Issue for repairs 72,000
Deficiency found in stock 21,600
Work-in-process: (`)
Direct wages applied 2,16,000
Overheads charged 8,64,000
Closing balance 1,44,000
Finished Production: (`)
Entire production is sold at a profit of 15% on cost of WIP
Wages paid 2,52,000
Overheads incurred 9,00,000
PREPARE Stores Ledger Control Account, Work-in-Process Control Account, Overheads Control Account
and Costing Profit and Loss Account.

Ans. Stores Ledger Control A/c

To Balance b/d 1,08,000 By Work in Process A/c 5,76,000
To General Ledger
Adjustment A/c 5,76,000 By Overhead Control A/c 72,000
To Work in Process A/c 2,88,000 By Overhead Control A/c 21,600*
(Deficiency)
_______ By Balance c/d 3,02,400
9,72,000 9,72,000
*Deficiency assumed as normal (alternatively can be treated as abnormal loss)
Work in Process Control A/c
To Balance b/d 2,16,000 By Stores Ledger Control a/c 2,88,000
To Stores Ledger Control A/c 5,76,000 By Costing P/L A/c 14,40,000
(Balancing figures being Cost of
finished goods)
To Overheads Control A/c 8,64,000 ________
18,72,000 18,72,000
Overheads Control A/c

Particulars (`) Particulars (` )
To Stores Ledger Control A/c 72,000 By Work in Process A/c 8,64,000
To Stores Ledger Control A/c 21,600 By Balance c/d 1,65,600
(Under absorption)
To Wages Control A/c
(` 2,52,000- ` 2,16,000) 36,000
To Gen. Ledger Adjust. A/c 9,00,000 ________
10,29,600 10,29,600
Costing Profit & Loss A/c
To Work in process 14,40,000 By Gen. ledger Adjust. A/c 16,56,000
(Sales) ( ` 14,40,000 × 115%)
To Gen. Ledger Adjust. A/c (Profit) 2,16,000 ________
16,56,000 16,56,000
Q-15 The Trading and Profit and Loss Account of a company for the year ended 31-03-20X8 is as under:
Trading and Profit and Loss Account
Particulars Rs. Particulars Rs.
To Materials 26,80,000 By Sales (50,000 units) 62,00,000
To Wages 17,80,000 By Closing Stock (2,000 units) 1,50,000
To Factory Expenses 9,50,000 By Dividend received 20,000
To Administrative Expenses 4,80,200
To Selling Expenses 2,50,000
To Preliminary Expenses written off 50,000
To Net Profit 1,79,800 ________
63,70,000 63,70,000

In the Cost Accounts:

(i) Factory expenses have been allocated to production at 20% of Prime Cost.
(ii) Administrative expenses (production related) absorbed at 10% of factory cost.
(iii) Selling expenses charged at Rs. 10 per unit sold.
PREPARE the Costing Profit and Loss Account of the company and reconcile the Profit/Loss with the
profit as shown in the Financial Accounts.
Ans. Workings:
Preparation of Cost Sheet/ Cost Statement
Materials 26,80,000
Wages 17,80,000
Add: Factory expenses (20% of Rs. 44,60,000) 8,92,000
Add: Administrative expenses (10% of Rs. 53,52,000) 5,35,200
 Rs.58,87,200 
Less: Closing Stock   2,000 units  (2,26,431)
 52,000 units 
Add: Selling expenses (Rs.10 × 50,000 units) 5,00,000
Profit (Balancing figure) 39,231
Sales Value 62,00,000
Costing Profit and Loss Account
Particulars Amount (Rs.) Particulars Amount (Rs.)
To Materials 26,80,000 By Sales 62,00,000
To Wages 17,80,000 By Closing stock 2,26,431
To Factory expenses 8,92,000
To Administrative expenses 5,35,200
To Selling expenses 5,00,000
To Profit (Balancing figure) 39,231 ________
64,26,431 64,26,431
Reconciliation of profit as per Cost Accounts and as per Financial Accounts
Profit as per Cost Accounts 39,231
Additions:
Administrative expenses (Over-absorbed) (Rs. 5,35,200 – Rs.4,80,200) 55,000
Selling expenses (Overcharged) ( Rs. 5,00,000 – Rs. 2,50,000) 2,50,000
Dividend received 20,000
3,64,231

Deductions:
Factory expenses (Under -absorbed) (Rs. 9,50,000 – 8,92,000) 58,000
Closing stock (Over-valued) (Rs.2,26,431 – Rs. 1,50,000) 76,431
Preliminary expenses written off 50,000
1,84,431
Profit as per Financial Accounts 1,79,800
(Reconciliation statement may also be prepared by taking financial profit as base.)
Q-16 A manufacturing company has disclosed a net loss of Rs 2,25,000 as per their cost accounting records for
the year ended March 31, 2019. However, their financial accounting records disclosed a net loss of Rs
2,70,000 for the same period. A scrutiny of data of both the sets of books of accounts revealed the
following information:
(Rs)
(i) Factory overheads under-absorbed 5,000
(ii) Administration overheads over-absorbed 3,000
(iii) Depreciation charged in financial accounts 70,000
(iv) Depreciation charged in cost accounts 80,000
(v) Interest on investments not included in cost accounts 20,000
(vi) Income-tax provided in financial accounts 65,000
(vii) Transfer fees (credit in financial accounts) 2,000
(viii) Preliminary expenses written off 3,000
(ix) Over-valuation of closing stock of finished goods in cost accounts 7,000
Required:
PREPARE a Memorandum Reconciliation Account.
(d) Memorandum Reconciliation Account
Particulars (Rs.) Particulars (Rs.)
To Net loss as per Costing books 2,25,000 By Administrative overhead 3,000
over absorbed in costs
To Factory overheads under absorbed 5,000 By Depreciation over charged in
Cost books(Rs. 80,000 – Rs.70,000) 10,000
To Income tax not provided in By Interest on investments not 20,000
Cost books 65,000 included in Cost books
To Preliminary expenses written off in 3,000 By Transfer fees not considered 2,000
Financial books in Cost books
To Over-valuation of Closing Stock of By Net loss as per Financial books 2,70,000
finished goods in Cost books 7,000 ______
3,05,000 3,05,000
Q-17 The following information have been extracted from the cost records of JKL Manufacturing Company
Ltd:
Rs.
Stores:
Opening Balance 90,000
Purchases 4,80,000


Work-in-Process:
Opening Balance 1,80,000
Overhead charged 7,20,000
Closing Balance 1,20,000
Finished Production:
Entire production is sold at a profit of 10% on cost from work-in-progress -
Wages Paid 2,10,000
Overhead Incurred 7,50,000
PREPARE Stores Ledger Control A/c., Work-in-Process Control A/c., Overheads Control A/c. and Costing
Profit & Loss A/c.
To Balance b/d 90,000 By Work in Process Control A/c 4,80,000
To General Ledger Adjustment A/c 4,80,000 By Overhead Control A/c 60,000
To Work in Process Control A/c 2,40,000 By Overhead Control A/c
(Deficiency) 18,000*
_______ By Balance c/d 2,52,000
8,10,000 8,10,000
Work in Process Control A/c
To Balance b/d 1,80,000 By Stores Ledger Control A/c 2,40,000
To Stores Ledger Control A/c 4,80,000 By Costing P/L A/c
(Balancing figures being
Cost offinished goods) 12,00,000
15,60,000 15,60,000
To Stores Ledger Control A/c 60,000 By Work in Process Control A/c 7,20,000
To Stores Ledger Control A/c 18,000 By Balance c/d* (Under absorption) 1,38,000
(` 2,10,000- `1,80,000) 30,000
To Gen. Ledger Adjust. A/c 7,50,000 _______
8,58,000 8,58,000
*Alternatively may be transferred to Costing P& L A/c


To Work in Process Control A/c 12,00,000 By Gen. Ledger Adjust. A/c
(Sales) (12,00,000+1,20,000) 13,20,000
To Gen. Ledger Adjust. A/c (Profit) 1,20,000 ________
13,20,000 13,20,000
General Ledger Adjustment A/c may also be written as Cost Ledger Control A/c.
Q-18 Discuss the essentials of good Cost Accounting System.
Ans. The essential features, which a good cost and management accounting system should possess, are as
follows:
(a) Informative and simple: Cost and management accounting system should be tailormade, practical,
simple and capable of meeting the requirements of a business concern.
The system of costing should not sacrifice the utility by introducing meticulous and unnecessary
details.
(b) Accurate and authentic: The data to be used by the cost and management accounting system
should be accurate and authenticated; otherwise it may distort the output of the system and a
wrong decision may be taken.
(c) Uniformity and consistency: There should be uniformity and consistency inclassification, treatment
(d) Integrated and inclusive: The cost and management accounting system should be integrated with
other systems like financial accounting, taxation, statistics and operational research etc. to have
a complete overview and clarity in results.
(e) Flexible and adaptive: The cost and management accounting system should be flexibleenough to
make necessary amendments and modification in the system to incorporatechanges in
technological, reporting, regulatory and other requirements.
(f) Trust on the system: Management should have trust on the system and its output. For this, an
active role of management is required for the development of such a system that reflect a strong
conviction in using information for decision making.
Q-19 Following information have been extracted from the cost records of ABC Ltd.
Stores: (Rs.)
Purchases 5,76,000
Work-in-progress: (Rs.)
Overheads charged 8,64,000
Closing balance 1,44,000

Finished Production: (Rs.)

Entire production is sold at a profit of 15% on cost of WIP
Wages paid 2,52,000
Overheads incurred 9,00,000
DETERMINE Stores Ledger Control Account, Work-in-Progress Control Account, Overheads Control
Account and Costing Profit and Loss Account.
To Balance b/d 1,08,000 By Work in Process A/c 5,76,000
To General LedgerAdjustment A/c 5,76,000 By Overhead Control A/c 72,000
To Work in Process A/c 2,88,000 By Overhead Control A/c
(Deficiency) 21,600*
_______ By Balance c/d 3,02,400
9,72,000 9,72,000
Work in Progress Control A/c
To Balance b/d 2,16,000 By Stores Ledger Control A/c 2,88,000
To Stores Ledger Control A/c 5,76,000 By Costing P/L A/c
(Balancing figures being
Costof finished goods) 14,40,000
18,72,000 18,72,000
To Stores Ledger Control A/c 72,000 By Work in Process A/c 8,64,000
To Stores Ledger Control A/c 21,600 By Balance c/d(Under absorption) 1,65,600
(Rs.2,52,000- Rs.2,16,000) 36,000
To Gen. Ledger Adjust. A/c 9,00,000 _________
10,29,600 10,29,600
To Work in progress 14,40,000 By Gen. ledger Adjust. A/c(Sales)
(Rs. 14,40,000 × 115%) 16,56,000
To Gen. Ledger Adjust.
A/c (Profit) 2,16,000 _______
16,56,000 16,56,000

Q-20 A manufacturing company disclosed a net loss of `6,94,000 as per their cost accounts for the year ended
March 31,2020. The financial accounts however disclosed a net loss of `10,20,000 for the same period.
The following information was revealed as a result of scrutiny of the figures of both the sets of accounts.
(`)
(i) Factory Overheads under-absorbed 80,000
(ii) Administration Overheads over-absorbed 1,20,000
(iii) Depreciation charged in Financial Accounts 6,50,000
(iv) Depreciation charged in Cost Accounts 5,50,000
(v) Interest on investments not included in Cost Accounts 1,92,000
(vi) Income-tax provided 1,08,000
(vii) Interest on loan funds in Financial Accounts 4,90,000
(viii) Transfer fees (credit in financial books) 48,000
(ix) Stores adjustment (credit in financial books) 28,000
(x) Dividend received 64,000
PREPARE a memorandum Reconciliation Account.
Ans. Memorandum Reconciliation Accounts
Dr. Cr.
(` ) (` )
To Net Loss as per Costing 6,94,000 By Administration 1,20,000
books overheads over
recovered in cost
accounts
To Factory overheads under 80,000 By Interest on investment 1,92,000
absorbed in Cost not included in Cost
Accounts Accounts
To Depreciation under 1,00,000 By Transfer fees in 48,000
charged in Cost Accounts Financial books
To Income-Tax not provided 1,08,000 By Stores adjustment
in Cost Accounts (Credit in financial books) 28,000
To Interest on Loan Funds in 4,90,000 By Dividend received in 64,000
Financial Accounts financial books
By Net loss as per 10,20,000
________ Financial books ________
14,72,000 14,72,000

Q-21 XYZ Ltd. maintains a non-integrated accounting system for the purpose of management information.
The following are the data related with year 2020-21:
Particulars (` in `000)
Opening balances:
- Stores ledger control A/c 24,000
- Work-in-process control A/c 6,000
- Finished goods control A/c 1,29,000
- Building construction A/c 3,000
- Cost ledger control A/c 1,62,000
During the year following transactions took place:
Materials:
- Purchased 12,000
- Issued to production 15,000
- Issued to general maintenance 1,800
- Issued to building construction 1,200
Wages:
- Gross wages paid 45,000
- Indirect wages paid 12,000
- For building construction 3,000
Factory overheads:
- Actual amount incurred (excluding items shown above) 48,000
- Absorbed in building construction 6,000
- Under-absorbed 2,400
Royalty paid 1,500
Selling, distribution and administration overheads 7,500
Sales 1,35,000
At the end of the year, the stock of raw material and work-in-process was ` 1,65,00,000 and ` 75,00,000
respectively. The loss arising in the raw material account is treated as factory overheads. The building
under construction was completed during the year. Gross profit margin is 20% on sales.
Required:
PREPARE the relevant control accounts to record the above transactions in the cost ledger of the company
Particulars (` in `000) Particulars (` in `000)
To Costing P&L A/c 1,35,000 By Balance b/d 1,62,000
To Building Construction A/c 13,200 By Stores Ledger control A/c 12,000
To Balance c/d 1,44,900 By Wages Control A/c 45,000
By Factory overhead control A/c 48,000
By Royalty A/c 1,500
By Selling, Distribution and
Administration overheads 7,500
_______ By Costing P&L A/c 17,100
2,93,100 2,93,100


To Balance b/d 24,000 By WIP control A/c 15,000
To Cost Ledger control A/c 12,000 By Factory overheads control A/c 1,800
By Building construction A/c 1,200
By Factory overhead control
A/c (bal. fig.) (loss) 1,500
______ By Balance c/d 16,500
36,000 36,000
To Cost Ledger control A/c 45,000 By Factory overhead control A/c 12,000
By Building Construction A/c 3,000
______ By WIP Control A/c (bal. fig.) 30,000
45,000 45,000
Factory Overhead Control Account
To Stores Ledger control A/c 1,800 By Building Construction A/c 6,000
To Wages Control A/c 12,000 By WIP Control A/c (bal. fig.) 54,900
To Cost Ledger control A/c 48,000 By Costing P&L A/c (underabsorption) 2,400
To Stores Ledger control A/c (loss) 1,500 _____
63,300 63,300
Royalty Account
To Cost Ledger control A/c 1,500 By WIP Control A/c 1,500
1,500 1,500
Work-in-process Control Account
To Balance b/d 6,000 By Finished goods control
A/c (bal. fig.) 99,900
To Stores Ledger control A/c 15,000
To Factory overhead control A/c 54,900
To Royalty A/c 1,500 By Balance c/d 7,500
1,07,400 1,07,400
Finished Goods Control Account
To Balance b/d 1,29,000 By Cost of Goods Sold A/c
(Refer working note) 1,08,000
To WIP control A/c 99,900 By Balance c/d 1,20,900
2,28,900 2,28,900

Cost of Goods Sold Account

To Finished Goods control A/c 1,08,000 By Cost of sales A/c 1,08,000
1,08,000 1,08,000
Selling, Distribution and Administration Overhead Control Account
To Cost Ledger control A/c 7,500 By Cost of sales A/c 7,500
7,500 7,500
To Cost of Goods Sold A/c 1,08,000 By Costing P&L A/c 1,15,500
To Selling, Distribution and
Administration A/c 7,500
1,15,500 1,15,500
Costing P&L Account
To Cost Ledger control A/c
(bal. fig.) (Profit) 17,100
1,35,000 1,35,000
Building Construction Account
To Balance b/d 3,000 By Cost Ledger control A/c 13,200
13,200 13,200
Trial Balance
Particulars Dr. Cr.
(` in `000) (` in `000)
Stores Ledger Control A/c 16,500
WIP Control A/c 7,500
Cost Ledger Control A/c 1,44,900
1,44,900 1,44,900
Workings:
`13,50,00,000  80
Cost of Goods sold = = ` 10,80,00,000
100

Q-22 The financial books of a company reveal the following data for the year ended 31 st March, 2020:
(`)
Opening Stock:
Finished goods 625 units 1,06,250
01.04.2019 to 31.03.2020
Administration overheads (production related) 3,96,000
Dividend paid 2,44,000
Bad Debts 36,000
Selling and Distribution Overheads 1,44,000
Sales 12,615 units 45,60,000
Closing Stock: Finished goods 415 units 91,300
The cost records provide as under:
 Factory overheads are absorbed at 70% of direct wages.
 Administration overheads are recovered at 15% of factory cost.
 Selling and distribution overheads are charged at ` 6 per unit sold.
 Opening Stock of finished goods is valued at ` 240 per unit.
 The company values work-in-process at factory cost for both Financial and Cost Profit Reporting.
Required:
(i) PREPARE statements for the year ended 31st March, 2020 showing:
 the profit as per financial records
 the profit as per costing records.
(ii) PREPARE a statement reconciling the profit as per costing records with the profit as per financial
records.
Ans. (i) Statement of Profit as per financial records
(for the year ended March 31, 2020)
(` ) (` )
To Opening stock of Finished Goods 1,06,250 By Sales 45,60,000
To Work-in-process 92,000 By Closing stock of finished
Goods 91,300
To Raw materials consumed 16,80,000 By Work-in-Process 82,400
To Direct labour 12,20,000 By Rent received 92,000
To Factory overheads 8,44,000 By Interest received 76,000
To Administration overheads 3,96,000
To Selling & distribution
overheads 1,44,000
To Dividend paid 2,44,000
To Bad debts 36,000
To Profit 1,39,450 ________
49,01,700 49,01,700

Statement of Profit as per costing records

(for the year ended March 31,2020)
(` )
Sales revenue (A) 45,60,000
(12,615 units)
Cost of sales:
Opening stock 1,50,000
(625 units × ` 240)
Add: Cost of production of 12,405 units 43,28,140
Production cost of goods sold (12,615 units) 43,33,345

Selling & distribution overheads
(12,615 units × ` 6) 75,690
Cost of sales: (B) 44,09,035
Profit: {(A) – (B)} 1,50,965
(` ) (` )
Profit as per Cost Accounts 1,50,965
Add: Administration overheads over absorbed 1,68,540
(` 5,64,540 – ` 3,96,000)
Opening stock overvalued 43,750
(`1,50,000 – ` 1,06,250)
Factory overheads over recovered 10,000 3,90,290
(` 8,54,000 – ` 8,44,000)
5,41,255
Less: Selling & distribution overheads under recovery 68,310
(` 1,44,000 – ` 75,690)
Closing stock overvalued (`1,44,795 – ` 91,300) 53,495
Dividend 2,44,000
Bad debts 36,000 (4,01,805)
Profit as per financial accounts 1,39,450

Working notes:
1. Number of units produced
Units
Sales 12,615
Add: Closing stock 415
Total 13,030
Less: Opening stock (625)
Number of units produced 12,405
2. Cost Sheet (`)
Direct labour 12,20,000
(70% of direct wages)
Add: Opening work-in-process 92,000
Less: Closing work-in-process (82,400)
Factory cost of goods produced 37,63,600
(15% of factory cost)
Cost of production of 12,405 units 43,28,140
Cost of production per unit:
Total Cost of Production `43,28,140

= = = ` 348.90
No.of units produced 12,405units
Q-23 XYZ Ltd. maintains a non-integrated accounting system for the purpose of management information.
The following are the data related with year 2020-21:
Particulars Amount (` ‘000)
Opening balances:
Materials:
- Purchased 24,000


Wages:
Factory overheads:
Royalty paid 3,000
Selling distribution and administration overheads 15,000
Sales 2,70,000
At the end of the year, the stock of raw material and work-in-process was ` 33,00,000, and ` 15,00,000
Required:
PREPARE the relevant control accounts to record the above transactions in the cost ledger of the company
Particulars (` in Particulars (` in
‘000) ‘000)
To Building Construction A/c 26,400 By Stores Ledger control A/c 24,000
By Factory overhead control A/c 96,000
By Royalty A/c 3,000
By Selling. Distribution and
_______ By Costing P&L A/c 34,200
5,86,200 5,86,200
Particulars (` in ‘000) Particulars (` in ‘000)
To Cost Ledger control A/c 24,000 By Factory overheads
control A/c 3,600
By Building construction A/c 2,400
By Factory overhead control
A/c (loss) (bal. fig.) 3,000
_____ By Balance c/d 33,000
72,000 72,000


To Cost Ledger control A/c 90,000 By Factory overhead control
A/c 24,000
______ By WIP Control A/c (bal. fig.) 60,000
90,000 90,000
To Wages Control A/c 24,000 By Costing P&L A/c 4,800
To Cost Ledger control A/c 96,000 By WIP Control A/c (bal. fig) 1,09,800
To Stores Ledger control A/c (loss) 3,000 _______
1,26,600 1,26,600
Royalty Account
3,000 3,000
To Balance b/d 12,000 By Finished goods control
A/c (bal. fig) 1,99,800
To Factory overhead control A/c 1,09,800
To Royalty A/c 3,000 By Balance c/d 15,000
2,14,800 2,14,800
To Balance b/d 2,58,000 By Cost of Goods Sold A/c 2,16,000
(Refer working note)
To WIP control A/c 1,99,800 By Balance c/d 2,41,800
4,57,800 4,57,800
2,16,000 2,16,000
15,000 15,000


To Selling, Distribution and 15,000
Administration A/c _______ _______
2,31,000 2,31,000
Costing P&L Account
To Cost Ledger control A/c 34,200 ______
2,70,000 2,70,000
To Factory overhead control A/c 12,000 ______
26,400 26,400
Trial Balance
Particulars Dr. Cr.
(` in ‘000) (` in ‘000)
Cost Ledger Control A/c ________ 2,89,800
2,89,800 2,89,800
Working Note:
`2,70,000  80
Cost of Goods sold = = ` 2,16,000
100
Q-24 The following data relates to manufacturing of a standard product during the month of March, 2021:
Particulars Amount (in `)
Work in Progress as on 01-03-2021 50,000
Purchase of Raw material 2,00,000
Carriage Inwards 20,000
Hire charges paid for Plant 24,000
Return of Raw Material 40,000

Expenses for participation in Industrial exhibition 8,000

Legal charges 2,500
Salary to office staff 25,000
Depreciation on Delivery van 6,000
Warehousing charges 1,500
Stock of Work in Progress as on 31-03-2021 24,000
• Store overheads on materials are 10% of material consumed.
• Factory overheads are 20% of the Prime cost.
• 10% of the output was rejected and a sum of ` 5,000 was realized on sale of scrap.
• 10% of the finished product was found to be defective and the defective products were rectified
at an additional expenditure which is equivalent to 20% of proportionate direct wages.
• The total output was 8000 units during the month.
You are required to prepare a Cost Sheet for the above period showing the:
(i) Cost of Raw Material consumed.
(ii) Prime Cost
(iii) Work Cost
(v) Cost of Sales
Ans. Statement of Cost for the month of March, 2021
(` ) (` )
(i) Cost of Material Consumed:
Add: Opening stock of raw materials 80,000
Direct expenses:
Hire charges paid for Plant 24,000 54,000
(ii) Prime Cost 4,04,000
Factory overheads (20% of Prime cost) 80,800
Additional expenditure for rectification of defective
products (refer working note) 2,160 1,11,960

(iii) Works/ Factory Cost 5,41,960

(iv) Cost of Production 5,36,960
Less: Closing stock of finished goods -
Selling overheads:
(v) Cost of Sales 5,81,960
Alternative Solution
(considering Hire charges paid for Plant as indirect expenses)
Statement of Cost for the month of March, 2021
(` ) (` )
Cost of Material Consumed:
Add: Opening stock of raw materials 80,000
Direct expenses:
Cost of special drawing 30,000 30,000
Prime Cost 3,80,000
Hire charges paid for Plant 24,000
Factory overheads (20% of Prime cost) 76,000
Additional expenditure for rectification of defective products
(refer working note) 2,160 1,31,160
Works/ Factory Cost 5,37,160


Less: Closing stock of finished goods -
Selling overheads:
Working Notes:
1. Number of Rectified units
Total Output 8,000 units
Less: Rejected 10% 800 units
Finished product 7,200 units
Rectified units (10% of finished product) 720 units
2. Proportionate additional expenditure on 720 units
= 20% of proportionate direct wages
= 0.20 x (` 1,20,000/8,000) x 720
= ` 2,160
Q-25 Explain what are the pre-requisites of integrated accounting.

Ans. The essential pre-requisites for integrated accounts include the following steps:
• The management’s decision about the extent of integration of the two sets of books.
Some concerns find it useful to integrate up to the stage of prime cost or factory cost while other
prefer full integration of the entire accounting records.
• A suitable coding system must be made available so as to serve the accounting purposes of financial
and cost accounts.
• An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other
adjustment necessary for preparation of interim accounts.
• Perfect coordination should exist between the staff responsible for the financial and cost aspects
of the accounts and an efficient processing of accounting documents should be ensured.
• Under this system there is no need for a separate cost ledger. Of course, there will be a number of
subsidiary ledgers; in addition to the useful Customers’ Ledger and the Bought Ledger, there will
be: (a) Stores Ledger; (b) Stock Ledger and (c) Job Ledger.

Q-26 X Ltd. maintains a non-integrated accounting system for the purpose of management information. The
following are the data related with year 2021-22:
Particulars Amount (‘000)
Opening balances:
Materials:
- Purchased 24,000
Wages:
Factory overheads:
Royalty paid 3,000
Selling distribution and administration overheads 15,000
Sales 2,70,000
At the end of the year, the stock of raw material and work-in-process was `3,30,00,000 and `15,00,000
Required:
PREPARE the relevant control accounts to record the above transactions in the cost ledger of the company.
Ans.
Cost Ledger Control Account
To Building Construction A/c 26,400 By Stores Ledger Control A/c 24,000
By Factory overhead control A/c 96,000 By Royalty A/c 3,000
By Selling, Distribution and
_______ By Costing P&L A/c 34,200
5,86,200 5,86,200


To Cost Ledger control A/c 24,000 By Factory overheads control A/c 3,600
By Building construction A/c 2,400 By Factory overhead control
A/c (loss) (Bal. fig) 3,000
______ By Balance c/d 33,000
72,000 72,000
To Balance b/d 12,000 By Finished goods control A/c 1,99,800
To Stores Ledger control A/c 30,000 To Wages Control A/c 60,000
To Factory overhead control A/c 1,09,800 To Royalty A/c 3,000
_______ By Balance c/d 15,000
2,14,800 2,14,800
To Balance b/d 2,58,000 By Cost of Goods Sold A/c 2,16,000
(Refer working note)
To WIP control A/c 1,99,800 By Balance c/d 2,41,800
4,57,800 4,57,800
To Selling, Distribution and
Administration A/c 15,000 _______
2,31,000 2,31,000
Costing P&L Account
To Cost Ledger control A/c 34,200 _______
2,70,000 2,70,000
To Stores Ledger control A/c 2,400 To Wages Control A/c 6,000
To Factory overhead control A/c 12,000 ______
26,400 26,400


To Wages Control A/c 24,000 By WIP Control A/c 1,09,800
To Cost Ledger control A/c 96,000 By Costing P&L A/c 4,800
To Stores Ledger control A/c (loss) 3,000 _______
1,26,600 1,26,600
To Cost Ledger control A/c 90,000 By Factory overhead control A/c 24,000
______ By WIP Control A/c 60,000
90,000 90,000
Royalty Account
3,000 3,000
2,16,000 2,16,000
15,000 15,000
Trial Balance
Particulars Dr. Cr.
(` in ‘000) (` in ‘000)
2,89,800 2,89,800
Working Note:
Cost of Goods sold = 2,70,000 × 80/100 = ` 2,16,000
---0---0---


CHAPTER - 8
UNIT & BATCH COSTING (RECONCILIATION)
Q-1 BTL LLP. manufactures glass bottles for HDL Ltd., a pharmaceutical company, which is inayurvedic
medicines business..
BTL can produce 2,00,000 bottles in a month. Set-up cost of each production run is ` 5,200 and the cost
of holding one bottle for a year is ` 1.50.
As per an estimate HDL Ltd. can order as much as 19,00,000 bottles in a year spreading evenly throughout
the year.
At present the BTL manufactures 1,60,000 bottles in a batch.
Required:
(i) Compute the Economic Batch Quantity for bottle production.
(ii) Compute the annual cost saving to BTL by adopting the EBQ of a production.
2DS
Ans. Economic Batch Quantity (EBQ) =
C
Where, D = Annual demand for the product
S = Setting up cost per batch
C = Carrying cost per unit of production
(i) Computation of EBQ :
2 ×19,00,000 × ` 5,200
=
` 1.5
= 1,14,775 bottles
(ii) Computation of savings in cost by adopting EBQ:
Batch Size No. of Batch Set-up cost Carrying cost Total Cost
1,60,000 62,400 1,20,000
bottles 12 (` 5,200 × 12) (`1.5 ×1,20,000 ½ × 1,60,000) 1,82,400
1,14,775 88,081.25 86,081.25
bottles 17 (`5,200 × 88,40017) (`1.586,081.25 × ½ × 1,14,775) 1,74,481.25
Saving 7,918.75
Q-2 Explain ‘Job Costing’ and ‘Batch Costing’.
Ans. Job costing: In this method of costing, cost of each job is ascertained separately. It is suitable in all cases
where work is undertaken on receiving a customer’s order like a printing press, motor work shop, etc.
This method of costing is used for non- standard and non- repetitive products produced as per customer
specifications and against specific orders. Jobs are different from each other and independent of each
other. Each Job is unique.

Batch Costing: It is the extension of Job costing. Homogeneous products are produced in a continuous
production flow in lots. A batch may represent a number of small orders passed through the factory in
batch. Each batch here is treated as a unit of cost and thus separately costed. Here cost per unit is
determined by dividing the cost of the batch by number of units produced in the batch.
Q-3 Arnav Confectioners (AC) owns a bakery which is used to make bakery items like pastries, cakes and
muffins. AC use to bake at least 50 units of any item at a time. A customer has given an order for 600
cakes. To process a batch, the following cost would be incurred:
Direct materials - ` 5,000
Direct wages - ` 500 (irrespective of units)
Oven set- up cost - `750 (irrespective of units)
AC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added to the total
production cost of each batch to allow for selling, distribution and administration overheads.
AC requires a profit margin of 25% of sales value.
Required:
(i) Determine the price to be charged for 600 cakes.
(ii) Calculate cost and selling price per cake.
(iii) Determine what would be selling price per unit If the order is for 605 cakes.
Ans. Statement of cost per batch and per order
No. of batch = 600 units ÷ 50 units = 12 batches
Particulars Cost per batch Total Cost
(` ) (` )
Direct Material Cost 5,000.00 60,000

Direct Wages 500.00 6,000
Oven set-up cost 750.00 9,000
Add: Production Overheads (20% of Direct wages) 100.00 1,200
Total Production cost 6,350.00 76,200
Add: S&D and Administration overheads
(10% of Total production cost) 635.00 7,620
Total Cost 6,985.00 83,820
Add: Profit (1/3rd of total cost) 2,328.33 27,940
(i) Sales price 9,313.33 1,11,760
No. of units in batch 50 units
(ii) Cost per unit (`6,985 ÷ 50 units) 139.70
Selling price per unit (9,313.33 ÷ 50 units) 186.27
(iii) If the order is for 605 cakes, then selling price per cake would be as below:
Particulars Total Cost (`)
Direct Wages (`500 × 13 batches) 6,500
Oven set-up cost (`750 × 13 batches) 9,750
-262- Chapter-8 : Unit & Batch Costing

Add: Production Overheads (20% of Direct wages) 1,300

Total Production cost 78,050
Add: S&D and Administration overheads
(10% of Total production cost) 7,805
Total Cost 85,855
Add: Profit (1/3rd of total cost) 28,618
Sales price 1,14,473
No. of units 605 units
Selling price per unit (`1,14,473 ÷ 605 units) 189.21
Q-4 Distinguish between Job and Batch costing.
Ans.
Sr. No Job Costing Batch Costing
1 Method of costing used for Homogeneous products produced in a
non- standard and non- repetitive continuous production flow in lots.
products produced as per customer
specifications and against specific orders.
2 Cost determined for each Job. Cost determined in aggregate for the entire Batch
and then arrived at on per unit basis.
3 Jobs are different from each other and Products produced in a batch are homogeneous and
independent of each other. Each lack of individuality.
Job is unique.
Q-5 A jobbing factory has undertaken to supply 300 pieces of a component per month for the ensuing six
months. Every month a batch order is opened against which materials and labour hours are booked at
actual. Overheads are levied at a rate per labour hour. The selling price contracted for is ` 8 per piece.
From the following data CALCULATE the cost and profit per piece of each batch order and overall
position of the order for 1,800 pieces.
Month Batch Material cost Direct wages Direct labour
Output (` ) (` ) hours
January 310 1150 120 240
February 300 1140 140 280
March 320 1180 150 280
April 280 1130 140 270
May 300 1200 150 300
June 320 1220 160 320
The other details are:
Month Chargeable expenses Direct labour
(` ) (Hours)
January 12,000 4,800
February 10,560 4,400
March 12,000 5,000
April 10,580 4,600
May 13,000 5,000
June 12,000 4,800

Ans. Statement of Cost and Profit per batch

Particulars Jan. Feb. March April May June Total
Batch output (in units) 310 300 320 280 300 320 1,830
Sale value (`) 2,480 2,400 2,560 2,240 2,400 2,560 14,640
Material cost (`) 1,150 1,140 1,180 1,130 1,200 1,220 7,020
Direct wages (`) 120 140 150 140 150 160 860
Chargeable expenses* (`) 600 672 672 621 780 800 4,145
Total cost (`) 1,870 1,952 2,002 1,891 2,130 2,180 12,025
Profit per batch (`) 610 448 558 349 270 380 2,615
Total cost per unit (`) 6.03 6.51 6.26 6.75 7.10 6.81 6.57
Profit per unit (`) 1.97 1.49 1.74 1.25 0.90 1.19 1.43
Overall position of the order for 1,200 units
Sales value of 1,800 units @ ` 8 per unit `14,400
Total cost of 1,800 units @ ` 6.57 per unit ` 11,826
Profit ` 2,574
Chargeable expenses
× Direct labour hours for batch
Direct labour hour for the month
Q-6 A Ltd. manufactures mother boards used in smart phones. A smart phone requires one mother board.
As per the study conducted by the Indian Cellular Association, there will be a demand of 180 million
smart phones in the coming year. A Ltd. is expected to have a market share of 5.5% of the total market
demand of the mother boards in the coming year. It is estimated that it costs ‘6.25 as inventory holding
cost per board per month and that the set-up cost per run of board manufacture is ‘33,500.
(i) COMPUTE the optimum run size for board manufacturing?
(ii) Assuming that the company has a policy of manufacturing 80,000 boards per run, CALCULATE how
(i) above?
Ans. (i) Computation of optimum run size
2×D × S
Optimum run size or Economic Batch Quantity (EBQ) =
C
Where, D= Annual demand i.e. 5.5% of 18,00,00,000 = 99,00,000 units
S= Set-up cost per run = `33,500
C= Inventory holding cost per unit per annum
= ` 6.25 × 12 months =`75
2 × 99, 00,000 units × ` 33, 500

EBQ = = 94, 042.5 units or 94, 043 units
` 75


Batch No. of Set-up Cost Inventory holding Total Cost
size setups (` ) cost (`) (` )
A 80,000 124 41,54,000 30,00,000
 99, 00, 000   80, 000 × ` 75 

units   (124 × `33,500)   71,54,000
 80, 000   2 
B 94,043 106 35,51,000 35,26,612.5
 99, 00, 000   94, 043 × ` 75 

units   (106 × `33,500)   70,77,612.50
 94, 043   2 
Extra Cost (A – B) 76,387.50
Q-7 The Profit and Loss account of ABC Ltd. for the year ended 31st March, 2021 is given below:
Profit and Loss account
(for the year ended 31st March, 2021)
To Direct Material 6,50,000 By Sales 15,00,000
(15000 units)
To Direct Wages 3,50,000 By Dividend received 9,000
To Factory overheads 2,60,000
To Administrative overheads 1,05,000
To Selling overheads 85,000
To Loss on sale of investments 2,000
To Net Profit 57,000 ________
15,09,000 15,09,000
• Factory overheads are 50% fixed and 50% variable.
• Administrative overheads are 100% fixed.
• Selling overheads are completely variable.
• Normal production capacity of ABC Ltd. is 20,000 units.
• Indirect Expenses are absorbed in the cost accounts on the basis of normal production capacity.
• Notional rent of own premises charged in Cost Accounts is amounting to ‘ 12,000.
(i) Prepare a Cost Sheet and ascertain the Profit as per Cost Records for the year ended 31st March,
2021.
(ii) Reconcile the Profit as per Financial Records with Profit as per Cost Records.

Ans. (i) Cost Sheet

(for the year ended 31st March, 2021)
(`) (`)
Direct material 6,50,000
Factory Overheads:
Variable (50% of ` 2,60,000) 1,30,000
Fixed (` 1,30,000 × 15,000/20,000) 97,500 2,27,500
Works cost 12,27,500
Administrative Overheads (` 1,05,000 × 15,000/20,000) 78,750
Notional Rent 12,000
Cost of production 13,18,250
Selling Overheads 85,000
Profit (Balancing figure) 96,750
Sales revenue 15,00,000
(Reconciling profit shown by Financial and Cost Accounts)
(`) (`)
Profit as per Cost Account 96,750
Add: Dividend received 9,000
Add: Notional Rent 12,000 21,000
Less: Factory Overheads under-charged in Cost Accounts 32,500
(` 2,60,000 – ` 2,27,500)
Less: Administrative expenses under-charged in Cost 26,250
Accounts (` 1,05,000 – ` 78,750)
Less: Loss on sale of Investments 2,000 (60,750)
Profit as per Financial Accounts 57,000
(Note: Solution can be done considering base profit as per Financial Accounts)
Q-8 Rollon Ltd. is committed to supply 96,800 bearings per annum to Racing Ltd. on steady basis. It is
estimated that it costs 25 paise as inventory carrying cost per bearing per month and the set-up cost per
run of bearing manufacture is ` 588.
(a) COMPUTE what would be the optimum run size for bearing manufacture?
(b) Assuming that the company has a policy of manufacturing 8,800 bearings per run, CALCULATE how
(a) above?
Ans. Optimum production run size (Q)
2DS 2  96,800  588

=  = 6,160 bearings.
C 0.25  12

(b) Calculation of Extra Cost

Total Cost (of maintaining the inventories) when production run size (Q) are 6,160 and 8,800 bearings
respectively.
Total cost = Total set-up cost + Total carrying cost.
Particulars When run size is 6,160 When run size is 8,800
bearings bearings
Total set up cost = 96,800 × ` 588 = ` 9,240 = 96,800 × ` 588 = ` 6,468
6,160 8,800
Or,
No. of setups = 15.71
(16 setups)
= 16 x ` 588 = ` 9,408
Total Carrying cost ½ × 6,160 × 0.25 × 12 ½ × 8,800 × 0.25 × 12
= ` 9,240 = ` 13,200
Total Cost ` 18,480/ ` 18,648 `19,668
` 1,188/ ` 1,020 is the extra cost incurred by the company due to run size not being optimum run size.
Q-9 The following data relates to the manufacturing project received for the budgeted output of 19,600
units. You are required to CALCULATE the selling price per unit covering a profit of 25% on the selling
price.
Direct materials: 40 sq. m. per unit @ ` 10.60 per sq. m.
Direct wages: Bonding department 48 hours per unit @ ` 25 per hour
Finishing department 30 hours per unit @ ` 19 per hour
Budgeted costs and hours per annum-
Variable overhead:
(`) Total hours
Bonding department 15,00,000 10,00,000
Finishing department 6,00,000 6,00,000
Fixed overhead-
(`)
Production 15,68,000
Selling and distribution 7,84,000
Administration (General) 3,92,000
Ans. Decision making Cost Sheet (per unit)
Particulars (Amount in `) (Amount in `)
Direct materials 40 m2 at ` 10.60 per m2 424
Direct wages:
Bonding department- 48 hours at ` 25 per hour 1,200
Finishing department- 30 hours at ` 19 per hour 570 1,770
Prime Cost 2,194

Variable overhead:*
Bonding department- 48 hours at ` 1.50 per hour 72
Finishing department- 30 hours at ` 1.00 per hour 30 102
Variable production cost 2,296
Fixed production overhead# 80
Total production cost 2,376
Selling and distribution cost$ 40
Administration cost$ 20 60
Total Cost 2,436
Working Notes:
* Variable overhead rates-
# Fixed production overhead rate per unit of output = = ‘ 80
$ Selling and production cost per unit of output = = ‘ 40
Administration cost per unit of output = = ‘ 20
Q-10 Brostom Ltd. manufactures ‘Stent’ that is used by hospitals in angioplasty, a procedure used to open
blocked coronary arteries without open-heart surgery. As per the estimates provided by Pharmaceutical
Industry Bureau, there will be a demand of 1 crore ‘Stents’ in the coming year. Brostom Ltd. is having a
market share of 10% of the total market demand of the Stents. It is estimated that it costs ` 3.00 as
inventory holding cost per stent per month and that the set-up cost per run of stent manufacture is `
450.
Required:
(i) WHAT would be the optimum run size for Stent manufacture?
(ii) WHAT is the minimum inventory holding cost?
Ans.
(i) Computation of Optimum Run size of ‘Stents’ or Economic Batch Quantity (EBQ)
Economic Batch Quantity (EBQ) =
Where, D = Annual demand for the Stents
= 1,00,00,000 × 10% = 10,00,000 units
S = Set- up cost per run
= ‘ 450

C = Carrying cost per unit per annum

= ‘ 3 × 12 = ‘ 36
2  10, 00, 000 ` 450

EBQ =
`36
= 5,000 units of Stents
(ii) Minimum inventory holding cost

Minimum Inventory Cost = Average Inventory × Inventory Carrying Cost per unit per annum
= (5,000 ÷ 2) × ` 36
= ‘ 90,000
(iii) Calculation of the extra cost due to manufacturing policy

When run size is 6,000 units When run size is 5,000
units i.e. at EBQ
10, 00, 000 10, 00, 000
Total set up cost = ` 450 = ` 450
6, 000 5, 000
Total Carrying cost ½ × 6,000 × ‘ 36 ½ × 5,000 × ‘ 36
= ‘ 1,08,000 = ‘ 90,000
Total Cost ‘ 1,83,000 ‘ 1,80,000
Extra cost = ‘ 1,83,000 - ‘ 1,80,000 = ‘ 3,000
---0---0---


CHAPTER - 9
JOB COSTING AND CONTRACT COSTING
Q-1 A factory uses job costing system. The following data are obtained from its books for the year ended
31st March, 2020:
Amount (`)
Direct materials 18,00,000
Selling and distribution overheads 10,50,000
Profit 12,18,000
(i) PREPARE a Job Cost sheet indicating the Prime cost, Cost of Production, Cost of sales and the Sales
value.
(ii) In 2019-20, the factory received an order for a job. It is estimated that direct materials required
will be `4,80,000 and direct labour will cost `3,00,000. DETERMINE what should be the price for
the job if factory intends to earn the same rate of profit on sales assuming that the selling and
distribution overheads have gone up by 15%. The factory overheads is recovered as percentage of
wages paid, whereas, other overheads as a percentage of cost of production, based on cost rates
prevailing in the previous year.
Ans. (i) Production Statement
For the year ended 31st March, 2020
Amount (`)
Profit 12,18,000
Sales value 73,08,000

Calculation of Rates:
` 9,00,000
1. Percentage of factory overheads to direct wages = ×100 = 60%
` 15,00,000
2. Percentage of administration overheads to Cost of production
` 8,40,000
×100 = 20%
` 42,00,000
3. Selling and distribution overheads = ` 10,50,000 × 115% = `12,07,500 Selling and distribution
overhead % to Cost of production
` 12,07,500
×100 = 28.75%
` 42,00,000
` 12,18,000
4. Percentage of profit to sales = ×100 = 16.67% or , 1/6
` 37,08,000
(ii) Calculation of price for the job received in 2019-20
Amount (`)
Prime Cost 7,80,000
Factory overheads (60% of ` 3,00,000) 1,80,000
Administration overheads (20% of ` 9,60,000) 1,92,000
Selling and distribution overheads (28.75% of ` 9,60,000) 2,76,000
Profit (1/5 of ` 14,28,000) 2,85,600
Q-2 Ispat Engineers Limited (IEL) undertook a plant manufacturing work for a client. It willcharge a profit
mark up of 20% on the full cost of the jobs. The following are the informationrelated to the job:
Direct materials utilised – `1,87,00,000
Direct labour utilised – 2,400 hours at `80 per hour
Budgeted production overheads are Rs. 48,00,000 for the period and are recovered on the basis of
24,000 labour hours.
Budgeted selling and administration overheads are `18,00,000 for the period and recovered on the
basis of total budgeted total production cost of `36,00,00,000.
Required:
Calculate the price to be charged for the job.
-272- Chapter-9 : Job Costing & Contrtact Costing

Ans. Calculation of job price

Direct materials 1,87,00,000
Direct wages (` 80 × 2,400 hours) 1,92,000
 ` 48,00,000 
Production over heads  ×2,400 hrs  4,80,000
 24,000 hrs 
Production cost 1,93,72,000

Selling and administration overheads 96,860
 ` 18,00,000 
 36,00,00,000 × ` 1,93,72,000 
 
Total cost of sales 1,94,68,860

Profit mark-up @ 20% 38,93,772
Price for the job 2,33,62,632
Q-3 Dream house (P) Ltd. is engaged in building two residential housing projects in the city. Particulars
related to two housing projects are as below:
HP-1 (`) HP-2 (`)
Work in Progress on 1st April 2018 7,80,000 2,80,000
Materials Purchased 6,20,000 8,10,000
Land purchased near to the site to open an office - 12,00,000
Brokerage and registration fee paid on the above purchase - 60,000
Wages paid 85,000 62,000
Wages outstanding as on 31st March, 2019 12,000 8,400
Donation paid to local clubs 5,000 2,500
Plant hire charges paid for three years effecting from 1st April 2018 72,000 57,000
Value of materials at site as on 31st March, 2019 47,000 52,000
Contract price of the projects 48,00,000 36,00,000
Value of work certified 20,50,000 16,10,000
Work not certified 1,90,000 1,40,000
A concrete mixture machine was bought on 1st April 2018 for `8,20,000 and used for 180 days in HP-1
and for 100 days in HP-2. Depreciation is provided @ 15% p.a. (this machine can be used for any other
projects)
PREPARE contract account for the two housing projects showing the notional profit or loss on each
project for the year ended 31st March, 2019.

Ans. Dr. Contract Account for the year ended 31st March, 2019 Cr.
Particulars HP-1 (`) HP-2 (`) Particulars HP-1 (`) HP-2 (`)
To Balance b/d: W-I-P 7,80,000 2,80,000 By Closing material 47,000 52,000
at site
To Material purchased 6,20,000 8,10,000 By W-I-P:
To Wages: (`85,000+`12,000) 97,000 70,400 Value of work certified 20,50,000 16,10,000
(`62,000+`8,400) Cost of work not certified 1,90,000 1,40,000
To Donation to local club* 5,000 2,500
To Plant hire charges:
(`72,000x1/3) 24,000
(`57,000x1/3) 19,000
To Depreciation on concrete mixture**:
(`8,20,000x15%x180/365) 60,658
(`8,20,000x15%x100/365) 33,699
To Notional profit 7,00,342 5,86,401 _________ _________
22,87,000 18,02,000 22,87,000 18,02,000
* Assuming donation paid to local club was exclusively for the above projects, hence included in the
contract account.
** Depreciation on concrete mixture machine is charged on the basis of number of days used for the
projects, as it is clearly mentioned in the question that this machine can be used for other projects also.
(Land purchased and brokerage and registration fee paid for this purpose cannot be charged to contract
account, hence not included in the contract account)
Q-4 GVL Ltd. commenced a contract on April 1, 2018. The total contract was for ` 1,08,50,000. It was decided
to estimate the total profit and to take to the credit of Costing P & L A/c the proportion of estimated
profit on cash basis which work completed bear to the total contract. Actual expenditure in 2018-19 and
estimated expenditure in 2019-20 are given below:
2018-19 2019-20
Actual (`) Estimated (`)
Material issued 18,24,000 32,56,000
Labour : Paid: 12,20,000 15,20,000
Outstanding at end 96,000 1,50,000
Plant purchased 9,00,000 _
Expenses : Paid: 4,00,000 7,00,000
Outstanding at the end: _ 1,00,000
Prepaid at the end 90,000 _
Plant returned to stores (a historical stores) 3,00,000 6,00,000
(on Sep. 30, 2019)
Material at site 1,20,000 3,00,000
Work-in progress certified 51,00,000 Full
Work-in-progress uncertified 1,60,000 _
Cash received 40,00,000 Full

The plant is subject to annual depreciation @ 20% of WDV cost. The contract is likely to be completed
on September 30, 2019.
Required:
(i) PREPARE the Contract A/c for the year 2018-19.
(ii) ESTIMATE the profit for the contract.
Ans. GVL Ltd.
Contract A/c
(April 1, 2018 to March 31, 2019)
To Materials Issued 18,24,000 By Plant returned to Stores
(Working Note 1) 2,40,000
To Labour 12,20,000 By Materials at Site 1,20,000
Add: Outstanding 96,000 13,16,000 By W.I.P.
To Plant Purchased 9,00,000 Certified 51,00,000
To Expenses 4,00,000 Uncertified 1,60,000 52,60,000
Less: Prepaid 90,000 3,10,000 By Plant at Site
(Working Note 2) 4,80,000
To Notional Profit 17,50,000 _________
61,00,000 61,00,000
GVL Ltd.
Contract A/c
(April 1, 2018 to September 30, 2019)
(For Computing estimated profit)
To Materials Issued
(` 18,24,000 + ` 32,56,000) 50,80,000 By Material at Site 3,00,000
To Labour Cost
(`12,20,000 + `96,000
+`14,24,000* + `1,50,000) 28,90,000 By Plant returned to
Storeson 31.03.2019. 2,40,000
To Plant purchased 9,00,000 By Plant returned to
Storeson 30.09.2019
(Working Note3) 4,32,000
To Expenses
(`3,10,000 + `7,90,000
+ `1,00,000) 12,00,000 By Contractee A/c 1,08,50,000
To Estimated profit 17,52,000 ________
1,18,22,000 1,18,22,000

Working Notes
(` )
1. Value of the Plant returned to Stores on 31.03.2019
Historical Cost of the Plant returned 3,00,000
Less: Depreciation @ 20% of WDV for one year (60,000)
2,40,000
2. Value of Plant at Site 31.03.2019
Historical Cost of Plant at Site (`9,00,000 – `3,00,000) 6,00,000
Less: Depreciation @ 20% on WDV for one year (1,20,000)
4,80,000
3. Value of Plant returned to Stores on 30.09.2019
Value of Plant (WDV) on 31.3.2019 4,80,000
Less: Depreciation @ 20% of WDV for a period of 6 months (48,000)
4,32,000
4. Expenses Paid for the year 2018-19
Total expenses paid 4,00,000
Less: Pre-paid at the end (90,000)
3,10,000
Q-5 The following data presented by the supervisor of a factory for a Job.
` per unit
Direct Material 120
Direct Wages @ ` 4 per hour
(Departments A-4 hrs,B-7 hrs,C-2 hrs & D-2 hrs)
Chargeable Expenses 20
Total 200
Analysis of the Profit and Loss Account for the year ended
31st March, 2019
` ` `
Material 2,00,000 Sales 4,30,000
Direct Wages
Dept. A 12,000
Dept.B 8,000
Dept.C 10,000
Dept.D 20,000 50,000
Special Store items 6,000
Overheads
Dept.A 12,000
Dept.B 6,000
Dept.C 9,000
Dept.D 17,000 44,000
Gross Profit c/d 1,30,000 _______
4,30,000 4,30,000
Selling Expenses 90,000 Gross Profit b/d 1,30,000
Net Profit 40,000 _______
1,30,000 1,30,000
It is also to be noted that average hourly rates for all the four departments are similar.

Required:
(i) Prepare a Job Cost Sheet.
(ii) Calculate the entire revised cost using the above figures as the base.
(iii) Ad4 20% profit on selling price to determine the selling price.
Ans. Job Cost Sheet
Customer Details _______ Job No._________________
Date of commencement ________ Date of completion _________
Direct materials 120
Direct wages:
Deptt. A ` 4.00 × 4 hrs. ` 16.00
Deptt. B ` 4.00 × 7 hrs. ` 28.00
Deptt. C ` 4.00 × 2 hrs. ` 8.00
Deptt. D ` 4.00 × 2 hrs. ` 8.00 60
Chargeable expenses 20
Prime cost 200
Overheads
` 12,000
Deptt. A = ×100 = 100% of ` 16 ` 16
` 12,000
` 6,000
Deptt. B = ×100 = 75% of ` 28 ` 21
` 8,000
` 9,000
Deptt. C = ×100 = 90% of ` 8 ` 7.20
` 10,000
` 9,000
= ×100 = 90% of ` 8 = ` 7.20
` 10,000
` 17,000
Deptt. D = ×100 = 85% of ` 8 ` 6.80 51.00
` 20,000
Works cost 251.00
` 90,000
Selling expenses = ×100 = 30% of work cost 75.30
` 3,00,000
Total cost 326.30
Profit (20% profit on selling price i.e 25% of total cost) 81.58
Selling price 407.88
Q-6 A construction company undertook a contract at an estimated price of ` 108 lakhs, which includes a
budgeted profit of ` 18 lakhs. The relevant data for the year ended 31.03.20X8 are as under:

( `000)
Materials issued to site 5,000
Direct wages paid 3,800
Plant hired 700
Site office costs 270
Materials returned from site 100
Direct expenses 500
Work certified 10,000
Work not certified 230
Progress payment received 7,200
A special plant was purchased specifically for this contract at ` 8,00,000 and after use on this contract till
the end of 31.02.20X8, it was valued at ` 5,00,000. This cost of materials at site at the end of the year was
estimated at ` 18,00,000 Direct wages accrued as on 31.03.20X8 was ` 1,10,000.
Required
PREPARE the Contract Account for the year ended 31st March, 20X8.
Ans. Contract Account for the year ended 31st March, 20X8
(`’000) (`’ 000)
To Material issued to site 5,000 By Material at site 1,800
To Direct wages 3,800 By Material returned 100
Add: Outstanding wages 110 3,910 By Work-in-progress:
To Plant hire 700 - Value of work certified 10,000
To Site office cost 270 - Work uncertified 230
To Direct expenses 500
To Depreciation (special plant) 300
To Notional profit c/d 1,450 _____
12,130 12,130
Q-7 A company has been asked to quote for a job. The company aims to make a net profit of 30% on sales.
The estimated cost for the job is as follows:
Direct materials 10 kg @`10 per kg
Direct labour 20 hours @ `5 per hour
Variable production overheads are recovered at the rate of ` 2 per labour hour.
Fixed production overheads for the company are budgeted to be `1,00,000 each year and are recovered
on the basis of labour hours.
There are 10,000 budgeted labour hours each year. Other costs in relation to selling, distribution and
administration are recovered at the rate of `50 per job.
DETERMINE quote for the job by the Company.
Ans. Determination of quotation price for the job
Cost (`)
Direct Material (10kg × `10) 100
Direct Labour (20hrs × `5) 100
Variable production overhead (20hrs × `2) 40
1,00,000
Fixed Overhead  20 hours
10,000 budgeted hours

Other costs 50
Total costs 490
Net profit is 30% of sales, therefore total costs represent 70% (` 490 × 100) ÷ 70 = ` 700 price to quote for
job.
To check answer is correct; profit achieved will be ` 210 (` 700 - ` 490)
= ` 210 ÷ ` 700 = 30%
Q-8 A factory uses job costing. The following data are obtained from its books for the year ended 31st
March, 2018:
Amount (`)
Profit 6,09,000
Required:
value.
will be ` 2,40,000 and direct labour will cost ` 1,50,000. DETERMINE what should be the price for
distribution overheads have gone up by 15%. The factory overheads is recovered as percentage of
wages paid, whereas, other overheads as a percentage of cost of production, based on cost rates
prevailing in the previous year.
Ans.
(i) Production Statement
For the year ended 31st March, 2018
Amount (`)
Profit 6,09,000
Calculation of Rates:
` 4,50,000
1. Percentage of factory overheads to direct wages = x 100 = 60%
`7,50,000
2. Percentage of administration overheads to Cost of production
` 4,20,000
 100 = 20%
`21,00,000

3. Selling and distribution overheads = ` 5,25,000 × 115% = ` 6,03,750

Selling and distribution overhead % to Cost of production
` 6,03,750
=  100 = 28.75%
`21,00,000
` 6,09,000
4. Percentage of profit to sales =  100 = 16.67%
`36,54,000
(ii) Calculation of price for the job received in 2018 -19
Amount (`)
Prime Cost 3,90,000
Factory overheads (60% of `1,50,000) 90,000
Administration overheads (20% of `4,80,000) 96,000
Selling and distribution overheads (28.75% of `4,80,000) 1,38,000
Profit (20% of `7,14,000) 1,42,800
Q-9 A company processes a raw material in its Department 1 to produce three products, viz. A, B and X at the
same split-off stage. During a period 1,80,000 kgs of raw materials were processed in Department 1 at
a total cost of ` 12,88,000 and the resultant output of A, B and X were 18,000 kgs, 10,000 kgs and 54,000
kgs respectively. A and B were further processed in Department 2 at a cost of ` 1,80,000 and ` 1,50,000
respectively.
X was further processed in Department 3 at a cost of `1,08,000. There is no waste in further processing.
The details of sales affected during the period were as under:
A B X
Quantity Sold (kgs.) 17,000 5,000 44,000
Sales Value (`) 12,24,000 2,50,000 7,92,000
There were no opening stocks. If these products were sold at split-off stage, the selling prices of A, B
and X would have been ` 50, ` 40 and ` 10 per kg respectively.
Required:
(i) Prepare a statement showing the apportionment of joint costs to A, B and X.
(ii) Prepare a statement showing the cost per kg of each product indicating joint cost and further
processing cost and total cost separately.
(iii) PREPARE a statement showing the product wise and total profit for the period.
(iv) Decide with supporting calculations as to whether any or all the products should be further
processed or not.
Ans. (i) Statement showing the apportionment of joint costs to A, B and X
Products A B X Total
Output (kg) 18,000 10,000 54,000
Sales value at the point of 9,00,000 4,00,000 5,40,000 18,40,000
split off (`) (` 50 x 18,000) (` 40 x 10,000) (` 10 x 54,000)

Joint cost apportionment

on the basis 6,30,000 2,80,000 3,78,000 12,88,000
 ` 12,88,000   ` 12,88,000 
of sales value  `18,40,000  ` 9,00,000   `18,40,000  ` 4,00,000 
  
 ` 12,88,000 
 `18,40,000  ` 5,40,000 
 
at the point of
split off (`)
(ii) Statement showing the cost per kg. of each product
(indicating joint cost; further processing cost and total cost separately)
Products A B X
Joint costs apportioned (`) : (I) 6,30,000 2,80,000 3,78,000
Production (kg) : (II) 18,000 10,000 54,000
Joint cost per kg (`): (I ÷ II) 35 28 7
Further processing Cost per kg. (`) 10 15 2
 ` 1,80,000   ` 1,50,000   ` 1,08,000 

     
 18,000 kg   10,000 kg   54,000 kg 
Total cost per kg (`) 45 43 9
(iii) Statement showing the product wise and total profit for the period
Sales value (`) 12,24,000 2,50,000 7,92,000
Add: Closing stock value (`)
(Refer to Working note 2) 45,000 2,15,000 90,000
Value of production (`) 12,69,000 4,65,000 8,82,000 26,16,000
Apportionment of joint cost (`) 6,30,000 2,80,000 3,78,000
Add: Further processing cost (`) 1,80,000 1,50,000 1,08,000
Total cost (`) 8,10,000 4,30,000 4,86,000 17,26,000
Profit (`) 4,59,000 35,000 3,96,000 8,90,000
Working Notes :
1.
Products A B X
Sales value (`) 12,24,000 2,50,000 7,92,000
Quantity sold (Kgs.) 17,000 5,000 44,000
Selling price `/kg 72 50 18
 ` 12,24,000   ` 2,50,000   ` 7,92,000 

     
 17,000 kg   5,000 kg   44,000 kg 
2. Valuation of closing stock:
Since the selling price per kg of products A, B and X is more than their total costs, therefore closing
stock will be valued at cost.

Closing stock (kgs.) 1,000 5,000 10,000
Cost per kg (`) 45 43 9
Closing stock value 45,000 2,15,000 90,000 3,50,000
(`) (` 45 x 1,000 kg) (` 43 x 5,000 kg) (` 9x10,000 kg)
(iv) Calculations for processing decision
Products A B X
Selling price per kg at the point of split off (`) 50 40 10
Selling price per kg after further processing (`) 72 50 18
(Refer to working Note 1)
Incremental selling price per kg (`) 22 10 8
Less: Further processing cost per kg (`) (10) (15) (2)
Incremental profit (loss) per kg (`) 12 (5) 6
Product A and X has an incremental profit per unit after further processing, hence, these two products
may be further processed. However, further processing of product B is not profitable hence, product B
shall be sold at split off point.
Q-10 A contractor prepares his accounts for the year ending 31st March each year. He commenced a contract
on 1st September, 2018. The following information relates to contract as on 31st March, 2019:
Material sent to site ` 18,75,000
Wages paid ` 9,28,500
Wages outstanding at end ` 84,800
Sundry expenses ` 33,825
Material returned to supplier ` 15,000
Plant purchased ` 3,75,000
Salary of supervisor ` 15,000 per month
(Devotes 1/3rd of his time on contract)
Material at site as on 31-03-2019 ` 2,16,800
Some of material costing ` 10,000 was found unsuitable and was sold for ` 11,200. On 31-12-2018 plant
which costs ` 25,000 was transferred to some other contract and on 31-01-2019 plant which costs `
32,000 was returned to stores. The plant is subject to annual depreciation @ 15% on written down
value method.
The contract price is ` 45,00,000. On 31st March, 2019 two-third-of the contract was completed. The
architect issued certificate covering 50% of the contract price.
Prepare Contract A/c and show the notional profit or loss as on 31st March, 2019.
Ans. Contract Account as on 31-03-2019
To Materials sent to site 18,75,000 By Material returned toSupplier 15,000
To Wages paid 9,28,500 By Material sold 11,200
Add: Outstanding 84,800 10,13,300 By Plant transferred toot her contract 23,750
To Plant purchased 3,75,000 By Plant returned tostores 30,000

To Sundry Expenses 33,825 By Plant at site c/d 2,90,175

To Salary of Supervisor{1/3 rd
(`15,000 × 7 month)} 35,000 By Material at site c/d 2,16,800
To Costing P & L A/c
(`11,200-10,000) 1,200 By Works Cost 27,46,400
33,33,325 33,33,325
To Works Cost 27,46,400 By Work-in-progress c/d
Work certified 22,50,000
By Work uncertified 6,86,600
To Notional profit
(Profit for the year) 1,90,200
_________ _________
29,36,600 29,36,600
Working Notes:
1. Value of plant transferred to other contract:
` 25,000 less Depreciation for 4 months
= ` 25,000-(` 25,000×15%×4/12) = ` 23,750
2. Value of plant returned to stores:
` 32,000 less Depreciation for 5 months
= ` 32,000-(` 32,000×15%×5/12) = ` 30,000
3. Value for work uncertified:
The cost of 2/3rd of the contract is ` 27,46,400
` 27,46,400
Cost of 100% " " " " × 3 = ` 41,19,600
2
 Cost of 50% of the contract which has been certified by the architect is ` 41,19,600 /2= ` 20,59,800.
Also, the cost of 1/3rd of the contract, which has been completed but not certified by the architect is `
(27,46,400- 20,59,800) = ` 6,86,600/-
Q-11 M/s. SD Private Limited commenced a contract on 1st July 2017 and the company closes its account for
the year on 31st March every year. The following information relates to the contract as on 31st March
2018.
(i) Material issued `9,48,000
(ii) Direct wages `4,57,200
(iii) Prepaid direct wages as on 31.3.2018 `1,08,000
(iv) Administration charges `7,20,000
(v) A supervisor, who is paid ` 50,000 per month, has devoted two-third of his time to this contract
(vi) A plant costing `7,85,270 has been on the site for 185 days, its working life is estimated at 9 years
and its scrap value is ` 75,000
The contract price is ` 42 lakhs. On 31st March 2018 two-third of the contract was completed. The Architect
issued certificate covering 50% of the contract price and the contractor had been paid `15.75 lakhs on
account.

Assuming 365 days in a year, you are required to :

(i) Prepare a Contract Account showing work cost
(ii) Calculate Notional Profit or Loss as on 31st March 2018
Ans Contract Account
To Material issued 9,48,000 By Machine (Working note 1)** 7,45,270
” Direct Wages 3,49,200
(4,57,200 – 1,08,000)
” Administrative charges 7,20,000
” Supervisor’s salary 3,00,000
(` 50,000 × 9 × 2/3)
” Machine** 7,85,270 ” Works cost 23,57,200
________ (balancing figure) ________
31,02,470 31,02,470
” Works cost 23,57,200 ” Value of work certified 21,00,000
(50%×42,00,000)
” Costing P&L A/c 3,32,100 ” Cost of work uncertified
(Notional profit) ________ (Working Note 2) 5,89,300
26,89,300 26,89,300
** Alternatively Depreciation on machine can be shown debit side of Contract Account.
Working notes:
1. Written down value of Machine:
7,85,270 185 days
Depreciation=  = ` 40,000
9years 365 days
Hence the value of machine after the period of 185 days = ` 7,85,270 – ` 40,000 = ` 7,45,270
2. The cost of 2/3rd of the contract is ` 23,57,200
` 23,57,200
 Cost of 100% “ “ “  3 = ` 35,35,800
2
Cost of 50% of the contract which has been certified by the architect is `. 17,67,900. Also, the cost of
1/3rd of the contract, which has been completed but not certified by the architect is `. 5,89,300.
Q-12 XYZ Construction Company took a contract for construction of a stadium on 1st April, 2017 at a price of
` 160 lakhs. The relevant information for the year ended 31st March, 2018 are as under:
Amount (` In `000)
Material purchased for the contract 6,800
Direct wages paid 3,450
Salaries 200
Direct wages prepaid at the end of the year 50
Salaries outstanding at the end of the year 100
Material returned to stores 150
Material at site as on 31st March, 2018 175
Payment received from the contractee (80% of work certified) 9,440
Work done but not certified 500

A plant was purchased for ` 12,00,000 on 1st November, 2017 and was in use at the site upto 31st March, 2018.
Depreciation is to be charged on plant @ 15% per annum on straight line basis. Material costing ` 50,000 was
stolen from the site.
(i) Prepare contract account for the year ended 31st March, 2018 showing the profit to be taken to Profit &
Loss Account.
(ii) Prepare Balance Sheet showing the relevant items.
Ans.
(i) Contract Account
Particulars (`’000) (`’000) Particulars (`’000) (`’000)
To Material purchased 6,800 By Material returned 150
” Direct wages 3,450 “ Work-in-progress:
Less: Prepaid wages (50) 3,400 Value of work certified 11,800
(`9,440 ÷ 0.8)
” Salaries 200 Cost of work uncertified 500
Add: Outstanding 100 12,300
300 “ Material stolen at Site 50
” Depreciation on Plant 75 ” Material at site 175
{(`1,200× 15%) × (5÷12)}
” Costing P&L A/c 2,100
(Notional profit)
(bal. figure) ______ ______
12,675 12,675
(ii) Balance Sheet (extract) as on 31st March, 2018
Liabilities (`’000) Assets (`’000)
Capital Plant at site 1,125
Add: Notional Profit 2,100 Work in Progress
Outstanding Salary 100 Work certified 11,800
Work uncertified 500
12,300
Cash & Bank (in transit) 9,440 2,860
Prepaid Direct wages 50
Material at site 175
Q-13 M/s. Bansals Construction Company Ltd. took a contract for Rs. 60,00,000 expected to be completed in
three years. T he following particulars relating to the contract are available:
20X7 (Rs.) 20X8 (Rs.) 20X9 (Rs.)
Materials 6,75,000 10,50,000 9,00,000
Wages 6,20,000 9,00,000 7,50,000
T ransportation cost 30,000 90,000 75,000
Other expenses 30,000 75,000 24,000
Cumulative work certified 13,50,000 45,00,000 60,00,000
Cumulative work uncertified 15,000 75,000 —

Plant costing Rs. 3,00,000 was bought at the commencement of the contract. Depreciation was to be
charged at 25% per annum, on the written down value method. T he contractee pays 75% of the value
of work certified as and when certified, and makes the final payment on completion of the contract.
You are required to PREPARE a contract account for th ree years .
Ans. Contract Account (For the year ended 20X7)
To Materials 6,75,000 By Plant at site c/d 2,25,000
(75% of Rs.3,00,000)
” Wages 6,20,000 ” Work-in-progress c/d:
” Transportation cost 30,000 - Work certified 13,50,000
” Other expenses 30,000 - Work uncertified 15,000 13,65,000
” Plant 3,00,000 ” Costing P & L A/c 65,000
(Loss for the year)
16,55,000 16,55,000
Contract Account (For the year ended 20X8)
To Plant at site b/d 2,25,000 By Plant at site c/d 1,68,750
(75% of Rs.2,25,000)
” Work-in-progress b/d: ” Work-in-progress c/d:
- Work certified 13,50,000 - Work certified 45,00,000
-Work uncertified 15,000
13,65,000 - Work uncertified 75,000 45,75,000
” Materials 10,50,000
” Wages 9,00,000
” Transportation cost 90,000
” Other expenses 75,000
” Costing P&L A/c 10,38,750
(Notional Profit for the year) ________ _________
47,43,750 47,43,750
Contract Account (For the year ended 20X9)
To Plant at site b/d 1,68,750 By Plant at site c/d 1,26,563
(75% of Rs.1,68,750)
” Work-in-progress b/d: ” Contractee A/c 60,00,000
- Work certified 45,00,000 ” Costing P&L A/c 3,66,187
(Notional Loss for the year)
-Work uncertified 75,000 45,75,000
” Materials 9,00,000
” Wages 7,50,000
” Transportation cost 75,000
” Other expenses 24,000 ________
64,92,750 64,92,750

Q-14 Define cost plus contract? STATE its advantages.

Ans. Cost plus contract: Under cost plus contract, the contract price is ascertained by adding a percentage of
profit to the total cost of the work. Such types of contracts are entered into when it is not possible to
estimate the contract cost with reasona ble accuracy due to unstable condition of material, labour
services etc.
Following are the advantages of cost plus contract:
(i) The contractor is assured of a fixed percentage of profit. T here is no risk of incurring any loss on the
contract.
(ii) It is useful specially when the work to be done is not definitely fixed at the time of making the
estimate.
(iii) Contractee can ensure himself about the ‘cost of contract’ as he is empowered to examine the books
and documents of the contractor to ascertain th e veracity of the cost of contract.
Q-15 Cimech Constructions Limited has entered into a big contract at an agreed price of Rs. 1,50,00,000
subject to an escalation clause for material and labour as spent out on the contract and corresponding
actual are as follows:
Material: Standard Actual
Quantity Rate per Ton Quantity Rate per Ton
(Tons) (Rs.) (Tons) (Rs.)
A 3,000 1,000 3,400 1,100
B 2,400 800 2,300 700
C 500 4,000 600 3,900
D 100 30,000 90 31,500
Labour: Hours Hourly Rate Hours Hourly Rate
(Rs.) (Rs.)
L1 60,000 15 56,000 18
L2 40,000 30 38,000 35
(i) ANALYSE admissible escalation claim and DET ERMINE the final contract price payable .
(ii) PREPARE the contract account, if the all expenses other than material and labour related to the
contract are Rs. 13 ,45,000.
Ans. In case of escalation clause in a contract, a contractor is paid for the any increase in price of materials
and rate of labours which are beyond the control of the contractor. Any increase in the cost du e to
inefficiencies in usage of the materials and labours are not admissible. Thus any increase in cost due to
usage in excess of standard quantity or hours are not paid.
(i) Statement showing Additional claim due to Escalation clause.
Standard Std. Rate Actual Variation in Escalation claim
Qty / ( Rs.) Rate (Rs.) Rate (Rs.) ( Rs.)
Hours
(a) (b) (c) (d) = (c- b) (e) = (a × d)
Material:
A 3,000 1,000 1,100 +100 +3,00,000
B 2,400 800 700 -100 -2,40,000
C 500 4,000 3,900 -100 -50,000
D 100 30,000 31,500 +1,500 +1,50,000
Material escalation claim 1,60,000

Labour:
L1 60,000 15 18 +3 +1,80,000
L2 40,000 30 35 +5 +2,00,000
Labour escalation claim 3,80,000
Statement showing Final Contract Price
(Rs.) (Rs.)
Agreed contract price 1,50,00,000
Add: Agreed escalation claim:
Material Cost 1,60,000
Labour Cost 3,80,000 5,40,000
Final Contract Price 1,55,40,000
(ii) Contract Account
Dr Cr.
To Material: By Contractee’s A/c 1,55,40,000
A – (3,400 × Rs. 1,100) 37,40,000
B – (2,300 × Rs. 700) 16,10,000
C – (600 × Rs. 3,900) 23,40,000
D – (90 × Rs. 31,500) 28,35,000 1,05,25,000
To Labour:
L1 – (56,000 × Rs.18) 10,08,000
L2 – (38,000 × Rs.35) 13,30,000 23,38,000
To Other expenses 13,45,000
To Estimated Profit 13,32,000 __________
1,55,40,000 1,55,40,000
Q-16 XYZ LLP, contractors and civil engineers, are building a new wing to a school. T he quoted fixed price for
the contract is Rs.30,00,000. Work commenced on 1st January 20X8 and is expected to be completed on
schedule by 30 June 20X9.
Data relating to the contract at the year ended 31st March 20X9 is as follows.
Amount (Rs.)
Plant sent to site at commencement of contract 2,40,000
Hire of plant and equipment 77,000
Materials sent to site 6,62,000
Materials returned from site 47,000
Wage related costs 1,32,000
Direct expenses incurred 34,000
Supervisory staff salaries - Direct 90,000
- Indirect 20,000
Regional office expenses apportioned to contract 50,000
Head office expenses apportioned to contract 30,000
Surveyor’s fees 27,000
Progress payments received from school 18,00,000
1. Plant is to be depreciated at the rate of 25% per annum following straight line method, with no residual
value.

2. Unused materials on site at 31st March are estimated at Rs. 50,000.

3. Wages owed to direct workers total Rs. 40,000
4. No profit in respect of this contract was included in the year ended 31st March 2016.
5. Budgeted profit on the contract is Rs. 8,00,000
6. Value of work certified by the surveyor is Rs. 24,00,000.
7. The surveyor has not certified the work costing Rs. 1,80,000
You are required to PREPARE the account for the school contract for the fifteen months ended 31st March
20X9, and CALCUL AT E the notional profit to date.
Ans. School Contract Account
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Plant 2,40,000 By Material returned 47,000
To Hire of plant 77,000 By Plant c/d 1,65,000
To Materials 6,62,000 By Materials c/d 50,000
To Direct wages 9,60,000 By WIP c/d:
Add: Accrued 40,000 10,00,000 Value of work certified 24,00,000
To Wages related costs 1,32,000 Cost of work not certified 1,80,000
To Direct expenses 34,000
To Supervisory staff:
Direct 90,000
Indirect 20,000 1,10,000
To Regional office expenses 50,000
To Head office expenses 30,000
To Surveyors’ fees 27,000
To Notional profit c/d 4,80,000 ________
28,42,000 28,42,000
Q-17 Arnav Confectioners (AC) owns a bakery which is used to make bakery items like pastries, cakes and
muffins. AC use to bake atleast 50 units of any item at a time. A customer has given an order for 600
cakes. To process a batch of 50 cakes, the following cost would be incurred:
Direct materials - Rs. 5,000
Direct wages - Rs. 500
Oven set-up cost - Rs. 750
AC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added to the total
production cost of each batch to allow for selling, distribution and administration overheads.
AC requires a profit margin of 25% of sales value.
Required:
(i) Determine the price to be charged for 600 cakes.
(ii) Calculate cost and selling price per cake.
(iii) Determine what would be selling price per unit If the order is for 605 cakes.
Ans. Statement of cost per batch and per order
No. of batch = 600 units ÷ 50 units = 12 batches

Particulars Cost per batch Total Cost

(Rs.) (Rs.)
Direct Material Cost 5,000.00 60,000
Direct Wages 500.00 6,000
Oven set-up cost 750.00 9,000
Add: Production Overheads (20% of Direct wages) 100.00 1,200
Total Production cost 6,350.00 76,200
Add: S&D and Administration overheads 635.00 7,620
(10% of Total production cost)
Total Cost 6,985.00 83,820
Add: Profit (1/3rd of total cost) 2,328.33 27,940
(i) Sales price 9,313.33 1,11,760
No. of units in batch 50 units
(ii) Cost per unit (Rs.6,985 ÷ 50 units) 139.70
Selling price per unit (9,313.33 ÷ 50 units) 186.27
(iii) If the order is for 605 cakes, then selling price per cake would be as below:
Particulars Total Cost (Rs.)
Direct Wages 6,050
Oven set-up cost 9,750
Add: Production Overheads (20% of Direct wages) 1,210
Total Production cost 77,510
Add: S&D and Administration overheads 7,751
(10% of Total production cost) ______
Total Cost 85,261
Add: Profit (1/3rd of total cost) 28,420
Sales price 1,13,681
No. of units 605 units
Selling price per unit (Rs.1,13,681 ÷ 605 units) 187.90
Q-18 A factory uses job costing. The following data are obtained from its books for the year ended 31st
March, 20X8:
Amount (Rs.)
Profit 6,09,000
value.
will be Rs.2,40,000 and direct labour will cost Rs.1,50,000. DETERMINE what should be the price for
distribution overheads have gone up by 15%. The factory recovers overheads as a percentage of
Cost of Production, based on cost rates prevailing in the previous year.

Ans. Working Notes:

(i) Calculation of no. of employees at the beginning and end of the year
At the Beginning At the end
of the year of the year
Data Processors 540 1,560
Payroll Processors [Left- 60 + Closing- 40 – Joined- 20] 80 40
Supervisors* 30 90
Voice Agents* 30 30
Assistant Managers* 20 30
Senior Voice Agents 4 12
Senior Data Processors 8 34
Team Leaders 60 0
Total 772 1,796
(*) At the beginning of the year:
Strength of Supervisors, Voice Agents and Asst. Managers =
[772 – {540 + 80 + 4 + 8 + 60} employees] or [772 – 692 = 80 employees]
3 3 2
[{Supervisors- 80 x = 30 , Voice Agents- 80 x = 30 & Asst. Managers- 80 x = 20} employees]
s]
8 8 8
At the end of the year :
[Supervisor-(Opening- 30 + 60 Joining) = 90; Voice Agents- (Opening- 30 + 20 Joined – 20 Left) = 30]
(ii) No. of Employees Separated, Replaced and newly recruited during the year
Particulars Separations New Recruitment Replacement Total Joining
Payroll Processors 60 -- 20 20
Supervisors -- 60 -- 60
Voice Agents 20 -- 20 20
Assistant Managers 10 10 10 20
Sr. Voice Agents -- 8 -- 8
Sr. Data Processors -- 26 -- 26
Team Leaders 60 -- -- --
Total 210 1,124 110 1,234
(Since, Corrs Consultanc y Ltd. and its subsidiary are maintaining separate Personnel Department, so
transfer-in and transfer -out are treated as recruitment and separation respectively.)
(a) Calculation of Labour Turnover:
Replacement Method = No.of employeesreplacedduringthe year x 100
110 100
 100 =  100 = 8.57%
(772 + 1,796) / 2 1,284
Separation Method = No.of employees separatedduringthe year x 100

210
= x 100 = 16.36%
1,284
(b) Labour Turnover under Flux Method
= No.of employees (Joined Separated) during the year x 10
= No.of employees (Re placed New recruited Separated) during the year x 100
1,234 + 210
x 10 = 112.46%
1,284
Labour Turnover calculated by the executive trainee of the Personnel department is incorrect as it has
not taken the No. of new recruitment while calculating the labour turnover under Flux method.
Q-19 APFL Ltd. deals in plumbing materials and also provides plumbing services to its customers. On 12th
August, 2019, APFL received a job order for a students’ hostel to supply and fitting of plumbing materials.
The work is to be done on the basis of specification provided by the hostel owner. Hostel will be
inaugurated on 5th September, 2019 and the work is to be completed by 3rd September, 2019. Following
are the details related with the job work:
Direct Materials
APFL uses a weighted average method for the pricing of materials issues.
Opening stock of materials as on 12th August 2019:
• 15mm GI Pipe, 12 units of 15 feet size @ Rs.600 each
• Other fitting materials, 60 units @ Rs. 26 each
• Stainless Steel Faucet, 6 units @ Rs. 204 each
• Valve, 8 units @ Rs. 404 each
Purchases:
On 16th August 2019:
• 20mm GI Pipe, 30 units of 15 feet size @ Rs. 610 each
• 10 units of Valve @ Rs. 402 each
• Other fitting materials, 150 units @ Rs. 28 each
• Stainless Steel Faucet, 15 units @ Rs. 209 each
• Valve, 14 units @ Rs. 424 each
Issues for the hostel job:
• 20mm GI Pipe, 2 units of 15 feet size
• Other fitting materials, 18 units


• Valve, 6 units
On 30th August:
• Stainless Steel Faucet, 15 units
Direct Labour:
Plumber: 180 hours @ Rs. 50 per hour (includes 12 hours overtime)
Helper: 192 hours @ Rs.35 per hour (includes 24 hours overtime)
Overtimes are paid at 1.5 times of the normal wage rate.
Overheads:
Overheads are applied @ Rs. 13 per labour hour.
Pricing policy:
It is company’s policy to price all orders based on achieving a profit margin of 25% on sales price.
You are required to
(a) Calculate the total cost of the job.
(b) Calculate the price to be charged from the customer.
Ans. (a) Calculation of Total Cost for the Hostel Job
Direct Material Cost:
- 15mm GI Pipe (Working Note- 1) 11,051.28
- Other fitting materials (Working Note- 3) 3,866.07
- Stainless steel faucet
 6 × ` 204 + 15× ` 209 

15 units ×  
 21 units 
- Valve 3,113.57
 8 × ` 404 +10 × ` 402 +14 ×` 424 

6 units ×   2,472.75 23,091.95
 32 units 
Direct Labour:
- Plumber [(180 hours × Rs. 50) + (12 hours × Rs. 25)] 9,300.00
- Helper [(192 hours × Rs. 35) + (24 hours × Rs. 17.5)] 7,140.00 16,440.00
- Overheads [Rs. 13 × (180 + 192) hours] 4,836.00
Total Cost 44,367.95

(b) Price to be charged for the job work:

Amount (Rs.)
Total Cost incurred on the job 44,367.95
 44,367.95 
Add: 25% Profit on Job Price  ×25%  14,789.32
 75% 
59,157.27
Working Note:
1. Cost of 15mm GI Pipe
Date Amount (Rs.)
17-08-2019 8 units × Rs. 600 4,800.00
 4 ×Rs.600 + 35×Rs.628 
10 units ×   _______
 39 units 
11,051.28
Date Amount (Rs.)
12-08-2019 2 units × Rs. 660 1,320.00
 8 ×Rs.660 + 30 ×Rs.610 + 20  Rs. 660 
28-08-2019 2 units ×   1,268.28
 58 units 
2,588.28
3. Cost of Other fitting materials
Date Amount (Rs.)
12-08-2019 18 units × Rs. 26 468.00
17-08-2019 30 units × Rs. 26 780.00
 12 ×Rs.26 +150 ×Rs.28 
28-08-2019 34 units ×   946.96
 162units 
 12 ×Rs.26 +150 ×Rs.28 

30-08-2019 60 units ×   1,671.11
 162units 
3,866.07
Q-20 Z Limited obtained a contract No. 999 for Rs. 50 lacs. The following details are available in respect of this
contract for the year ended March 31, 20X8:
Rs.
Materials purchased 1,60,000
Materials issued from stores 5,00,000
Wages and salaries paid 7,00,000
Drawing and maps 60,000
Sundry expenses 15,000
Electricity charges 25,000
Plant hire expenses 60,000
Sub-contract cost 20,000
Materials returned to stores 30,000

The following balances relating to the contract No. 999 for the year ended on March 31, 20X7 and March
31, 20X8 are available:
as on 31st March, 20X7 as on 31st March, 20X8
Work certified 12,00,000 35,00,000
Work uncertified 20,000 40,000
Materials at site 15,000 30,000
Wages outstanding 10,000 20,000
The contractor receives 75% of work certified in cash.
PREPARE Contract Account and Contractee's Account.
Ans. Contract No. 999 Account for the year ended 31st March, 20X8
Dr. Cr.
Particulars Amount(Rs.) Particulars Amount(Rs.)
To Work in progress b/d: By Material returned to store 30,000
- Work certified 12,00,000 By Material returned tosuppliers 20,000
- Work uncertified 20,000 By Stock (Material) c/d 30,000
To Stock (Materials) b/d 15,000 By Work in progress c/d:
To Material purchased 1,60,000 - Work certified 35,00,000
To Material issued 5,00,000 - Work uncertified 40,000
To Wages paid 7,00,000
Less: Opening O/s (10,000)
Add: Closing O/s 20,000 7,10,000
To Drawing and maps* 60,000
To Sundry expenses 15,000
To Electricity charges 25,000
To Plant hire expenses 60,000
To Sub- contract cost 20,000
To Notional profit c/d
(balancing figure) 8,35,000 _______-
36,20,000 36,20,000
*Assumed that expenses incurred for drawing and maps are used exclusively for this contract only.
Dr. Contractee’s Account Cr.
Particulars Amount(Rs.) Particulars Amount(Rs.)
To Balance c/d
(Rs. 35,00,000 × 75%) 26,25,000 By Balance b/d
(75% of Rs. 12,00,000) 9,00,000
________ By Bank A/c 17,25,000
26,25,000 26,25,000
Q-21 AP Ltd. received a job order for supply and fitting of plumbing materials. Following are the details
related with the job work:
Direct Materials
AP Ltd. uses a weighted average method for the pricing of materials issues.
Opening stock of materials as on 12th August 2020:

- 15mm GI Pipe, 12 units of (15 feet size) @ ` 600 each

- Other fitting materials, 60 units @ ` 26 each
- Stainless Steel Faucet, 6 units @ ` 204 each
- Valve, 8 units @ ` 404 each
Purchases:
- 10 units of Valve @ ` 402 each
- Other fitting materials, 150 units @ ` 28 each
- Stainless Steel Faucet, 15 units @ ` 209 each
- Valve, 14 units @ ` 424 each
Issues for the hostel job:
- 20mm GI Pipe, 2 units of (15 feet size)
- Other fitting materials, 18 units
- Valve, 6 units
- Stainless Steel Faucet, 15 units
Direct Labour:
Plumber: 180 hours @ `100 per hour (includes 12 hours overtime)
Helper: 192 hours @ `70 per hour (includes 24 hours overtime)
Overtimes are paid at 1.5 times of the normal wage rate.
Overheads:
Overheads are applied @ ` 26 per labour hour.
Pricing policy:
It is company’s policy to price all orders based on achieving a profit margin of 25% on sales price.
You are required to
(a) CALCULATE the total cost of the job.
(b) CALCULATE the price to be charged from the customer

Ans.(a) Calculation of Total Cost for the Job:

Direct Material Cost:
- Other fitting materials (Working Note- 3) 3,866.07
- Stainless steel faucet
 6 × `204 + 15 × `209 
15 units ×   3,113.57
 75% 
- Valve
 8 × ` 404 + 10 × ` 402 + 14 × ` 424 

6 units ×   2,472.75 23,091.95
 32units 
Direct Labour:
- Plumber [(180 hours × `100) + (12 hours × `50)] 18,600.00
- Helper [(192 hours × `70) + (24 hours × `35)] 14,280.00 32,880.00
- Overheads[`26 × (180 + 192) hours] 9,672.00
Total Cost 65,643.95
(b) Price to be charged for the job work:
Amount (`)
Total Cost incurred on the job 65,643.95
 65, 643, 95 
Add: 25% Profit on Job Price  × 25%  21,881.32
 75% 
87,525.27
Working Note:
Date Amount (`)
17-08-2020 8 units × ` 600 4,800.00
 4 x 600 + 35 x 628 
28-08-2020 10 units ×   6,251.28
 39 units 
11,051.28
Date Amount (`)
12-08-2020 2 units × ` 660 1,320.00
 8 x 660 + 30 x 610 + 20 x 660 

28-08-2020 2 units ×   1,268.28
 58 units 
2,588.28

3. Cost of Other fitting materials

Date Amount (`)
12-08-2020 18 units × `26 468.00
17-08-2020 30 units × ` 26 780.00
 12 x 26 + 150 x 28 
28-08-2020 34 units ×   946.96
 162 units 
 12 x 26 + 150 x 28 
30-08-2020 60 units ×   1,671.11
 162 units 
3,866.07
Q-22 A contractor has entered into a long term contract at an agreed price of `18,70,000 subject to an
escalation clause for materials and wages as spelt out in the contract and corresponding actuals are as
follows:
Standard Actual
Materials Qty (tons) Rate (`) Qty (tons) Rate (`)
A 6,000 50.00 6,050 48.00
B 3,000 80.00 2,950 79.00
C 2,500 60.00 2,600 66.00
Wages Hours Hourly Rate (`) Hours Hourly Rate (`)
X 3,000 70.00 3,100 72.00
Y 2,500 75.00 2,450 75.00
Z 3,000 65.00 3,100 66.00
Reckoning the full actual consumption of material and wages, the company has claimed a final price
of ` 18,94,100. Give your ANALYSIS of admissible escalation claim and indicate the final price payable.
Ans.
Standard Standard Actual Rate Variation in Rate Escalation
Qty/Hrs. Rate (`) (` ) (` ) Claim (`)
(a) (b) (c) (d) = (c)–(b) (e) =(a) × (d)
Materials
A 6,000 50.00 48.00 (–) 2.00 (–) 12,000
B 3,000 80.00 79.00 (–) 1.00 (–) 3,000
C 2,500 60.00 66.00 (+) 6.00 15,000
Materials escalation claim: (A) 0
Wages
X 3,000 70.00 72.00 (+) 2.00 6,000
Y 2,500 75.00 75.00 - -
Z 3,000 65.00 66.00 (+) 1.00 3,000
Wages escalation claim: (B) 9,000
Final claim: (A + B) 9,000

Statement showing final price payable

Agreed price ` 18,70,000
Agreed escalation:
Material cost —
Labour cost ` 9,000 ` 9,000
Final price payable ` 18,79,000
The claim of ` 18,94,100 is based on the total increase in cost. This can be verified as shown below:
Statement showing total increase in cost
Standard Cost Actual Cost Increase/
Qty/hrs Rate (`) Amount (`) Qty/hrs Rate (`) Amount (`) (Decrease)
(a) (b) (c) = (a)×(b) (d) (e) (f) =(d) × (e) g = (f) – (c)
I. Materials
A 6,000 50.00 3,00,000 6,050 48.00 2,90,400
B 3,000 80.00 2,40,000 2,950 79.00 2,33,050
C 2,500 60.00 1,50,000 2,600 66.00 1,71,600
6,90,000 6,95,050 5,050
II. Wages
X 3,000 70.00 2,10,000 3,100 72.00 2,23,200
Y 2,500 75.00 1,87,500 2,450 75.00 1,83,750
Z 3,000 65.00 1,95,000 3,100 66.00 2,04,600
5,92,500 6,11,550 19,050
24,100
Contract price ` 18,70,000

Add: Increase in cost ` 24,100
The final price claimed by the company ` 18,94,100
This claim is not admissible because escalation clause covers only that part of increase in cost, which
has been caused by inflation.
Note: It is fundamental principle that the contractee would compensate the contractor for the increase
in costs which are caused by factors beyond the control of contractor and not for increase in costs
which are caused due to inefficiency or wrong estimation.
Q-23 WRITE NOTE on cost-plus-contracts.
Ans. Cost-Plus Contracts: These contracts provide for the payment by the contractee of the actual cost of
construction plus a stipulated profit, mutually decided between the two parties.
The main features of these contracts are as follows:
(i) The practice of cost-plus contracts is adopted in the case of those contracts where the probable
cost of the contracts cannot be ascertained in advance with a reasonable accuracy.

(ii) These contracts are preferred when the cost of material and labour is not steady and the contract
completion may take number of years.
(iii) The different costs to be included in the execution of the contract are mutually agreed, so that no
dispute may arise in future in this respect. Under such type of contracts, contractee is allowed to
check or scrutinize the concerned books, documents and accounts.
(iv) Such a contract offers a fair price to the contractee and also a reasonable profit to the contractor.
The contract price here is ascertained by adding a fixed and mutually pre-decided component of profit
to the total cost of the work.
Q-24 From the following particulars, COMPUTE Notional profit and estimated profit on a contract (which has
been 80% complete):
(`)
Total expenditure to date 4,00,000
Estimated further expenditure to complete the contract
(including contingencies) 22,000
Contract price 5,44,000
Work uncertified 30,200
Cash received 3,91,680
Ans.
Computation of Notional Profit (`)
Value of work certified 4,89,600
Less: Cost of work certified
(` 4,00,000 - ` 30,200) 3,69,800
Notional profit 1,19,800
Computation of Estimated Profit (`)
Contract price 5,44,000
Less: Estimated total cost
Cost of work to date 4,00,000
Estimated further expenditure to complete the contract 22,000 4,22,000
Estimated profit 1,22,000
Q-25 Brick Constructions Ltd. commenced a contract on April 1,2020. The contract was for ` 10,00,000. The
following information relates to the Contract as on 31st March, 2021:
• The value of work completed up to Feb. 28, 2021 was certified by the architect and as a matter of
policy, the Contractee has retained ` 1,30,000 as retention money which is 20% of the certified
work and paid the balance amount.
• The cost of work completed subsequent to the architect’s certificate was of ` 30,000.
• The expenditure incurred related to material purchase, wages and other chargeable expenses
were ` 5,10,000
• Materials of the value of ` 20,000 were lying on the site.
• A special plant was purchased specifically for this contract at ` 40,000 and after use on this contract
till 31st March, 2021, it was valued at ` 25,000.
You are required to compute the value of Work Certified, Cash received for certified work and Notional
profit of the contract for the year ended on 31st March, 2021.

Ans. 1. Value of Work Certified

= ` 1,30,000 / 20% = ` 6,50,000
2. Cash Received
= Value of Work certified – Retention Money
= 6,50,000 – 1,30,000 = ` 5,20,000
3. Notional Profit
= Value of Work certified – Cost of work certified
= 6,50,000 - 4,75,000* = ` 1,75,000
*Working Note
Cost of work certified = Work cost - Cost of work uncertified
= (Expenditure + Plant used – Material at site) - Cost of work uncertified
= [5,10,000 + (40,000 - 25,000) - 20,000] - 30,000 = ` 4,75,000
Q-26 W Limited undertook a contract for ` 5,00,000 on 1st July, 2019. On 30th June, 2020 when the accounts
were closed, the following details about the contract were gathered:
Amount (`)
Wages paid 45,000
General expenses 10,000
Materials on hand (30-6-2020) 25,000
Wages accrued (30-6-2020) 5,000
Cash received 1,50,000
Work uncertified 15,000
The above contract contained “Escalation clause” which read as follows :
“In the event of increase in the prices of materials and rates of wages by more than 5%, the contract
price would be increased accordingly by 25% of the rise in the cost of materials and wages beyond 5%
in each case.”
It was found that since the date of signing the agreement, the prices of materials and wage rates
increased by 25%. The value of the work certified does not take into account the effect of the above
clause.
Calculate the ‘value of work certified’ after taking the effect of ‘Escalation Clause’ as on 30th June,
2020.
Ans. Workings:
(i) Percentage of work certified:
(ii) Value of material and labour used in the contract:

Material purchased 1,00,000
Less: Material on hand (30-06-2020) (25,000) 75,000
Wages paid 45,000
Add: Wages accrued (30-06-2020) 5,000 50,000
1,25,000

Price of materials and wages has been increased by 25%, the value before price increase is:
(iii) Calculation of Value of work certified:

The value of the contract would be increased by 25% of the price increased beyond 5%.
Price increased beyond 5% = ` 25,000 – 5% of ` 1,00,000 = ` 20,000
Value of contract would be increased by 25% of ` 20,000 = ` 5,000
Therefore, the revised contract value = ` 5,00,000 + ` 5,000 = ` 5,05,000
Calculation of the Value of work certified after taking the effect of escalation clause:
Revised contract value × Percentage of work certified
= ` 5,05,000 × 40% = ` 2,02,000
Q-27 RN Builders Ltd. entered into a contract on April 1, 2019. The total contract was for ` 2,00,00,000. Actual
expenditure for the period April 1, 2019 to March 31, 2020 and estimated expenditure for April 1, 2020
to December 31, 2020 are given below:
Particulars 2019-20 2020-21
(actual) (9 months) (estimated)
(`) (`)
Materials issued 36,00,000 34,30,000
Wages: Paid 30,00,000 34,93,000
Outstanding at the end 2,50,000 3,32,000
Plant purchased 10,00,000 -
Sundry expenses: Paid 2,90,000 2,75,000
Prepaid at the end 25,000 -
Establishment charges 5,85,000 -
A part of the material was unsuitable and thus sold for ` 7,25,000 (cost being ` 6,00,000) and a part of plant
was scrapped and disposed-off for ` 1,15,000. The value of plant at site on 31 March, 2020 was ` 3,10,000 and
the value of material at site was ` 1,70,000.
Cash received on account to date was ` 70,00,000, representing 80% of the work certified.
The cost of work uncertified was valued at ` 10,95,000.
The contract would be completed by 31st December, 2020 and the contractor estimated further expenditure
that would be incurred in completion of the contract:
 A sum of ` 12,50,000 would have to be spent on the plant and the residual value of the plant on the
completion of the contract would be ` 1,50,000.
 Establishment charges would cost the same amount per month as in the previous year.
 ` 4,32,000 would be sufficient to provide for contingencies.
Required:
PREPARE a Contract Account for the year ended 31st March, 2020, and CALCULATE estimated total profit on
this contract.

Ans. RN Builders Ltd.

Contract Account (2019-20)
To Materials issued 36,00,000 By Material sold 7,25,000
To Wages paid 30,00,000 By Plant sold 1,15,000
Add: Outstanding 2,50,000 32,50,000 By Plant at site c/d 3,10,000
To Plant 10,00,000 By Material at site c/d 1,70,000
To Sundry Expenses 2,90,000 By Work-in-progress c/d
Less: Prepaid (25,000) 2,65,000 Work certified 87,50,000
(` 70,00,000 ÷ 80%)
To Establishment charges 5,85,000 Work uncertified 10,95,000 98,45,000
To Costing P & L A/c
(` 7,25,000 – ` 6,00,000) 1,25,000
To Notional profit (Profit for the year) 23,40,000
1,11,65,000 1,11,65,000
Calculation of Estimated Profit
Particulars (`) (`)
(1) Material consumed (36,00,000+ 1,25,000– 7,25,000) 30,00,000
Add: Further consumption 34,30,000 64,30,000
(2) Wages: 32,50,000
Add: Further cost (34,93,000 – 2,50,000) 32,43,000
Add: Outstanding 3,32,000 68,25,000
(3) Plant used (10,00,000– 1,15,000) 8,85,000
Add: Further plant introduced 12,50,000
Less: Closing balance of plant (1,50,000) 19,85,000
(4) Establishment charges 5,85,000
Add: Further charges for nine months (5,85,000 x 9/12) 4,38,750 10,23,750
(5) Sundry expenses 2,90,000
Add: Further expenses 2,75,000 5,65,000
(6) Reserve for contingencies 4,32,000
Estimated profit (balancing figure) 27,39,250
Contract price 2,00,00,000
Q-28 SM Motors Ltd. is a manufacturer of auto components. Following are the details of expenses for the
year 2019-20:
(`)
(i) Opening Stock of Material 15,00,000
(ii) Closing Stock of Material 20,00,000
(iii) Purchase of Material 1,80,50,000
(iv) Direct Labour 90,50,000
(v) Factory Overhead 30,80,000
(vi) Administrative Overhead 20,50,400
During the FY 2020-21, the company has received an order from a car manufacturer where it estimates
that the cost of material and labour will be `80,00,000 and ` 40,50,000 respectively. The company
charges factory overhead as a percentage of direct labour and administrative overheads as a percentage
of factory cost based on previous year’s cost.

Cost of delivery of the components at customer’s premises is estimated at ` 4,50,000.

(i) CALCULATE the overhead recovery rates based on actual costs for 2019-20.
(ii) PREPARE a Job cost sheet for the order received and the price to be quoted if the desired profit is
25% on sales.
Ans.(i) Calculation of Overhead Recovery Rate:
Factory Overhead Recovery Rate =
Administrative Overhead Recovery Rate
Working Note:
Calculation of Factory Cost in 2019-20
Opening Stock of Material 15,00,000
Add: Purchase of Material 1,80,50,000
Less: Closing Stock of Material (20,00,000)
Material Consumed 1,75,50,000
Factory Overhead 30,80,000
(ii) Job Cost Sheet for the order received in 2020-21
Materia 80,00,000
Labour 40,50,000
Factory Overhead (34% of ` 40,50,000) 13,77,000
Administrative Overhead (6.91% of ` 1,34,27,000) 9,27,806
Cost of delivery 4,50,000
Total Cost 1,48,04,806
Add: Profit @ 25% of Sales or 33.33% of cost 49,34,935
Sales value (Price to be quoted for the order) 1,97,39,741
Hence the price to be quoted is ` 1,97,39,741

Q-29 KJ Motors Ltd. is a manufacturer of auto components. Following are the details of expenses for the year
2020-21:
(`)
(i) Opening Stock of Material 15,00,000
(ii) Closing Stock of Material 20,00,000
(iii) Purchase of Material 1,80,50,000
(iv) Direct Labour 90,50,000
(v) Factory Overhead 30,80,000
(vi) Administrative Overhead 20,50,400
During the FY 2021-22, the company has received an order from a car manufacturer where it estimates
that the cost of material and labour will be ` 80,00,000 and ` 40,50,000 respectively. The company
charges factory overhead as a percentage of direct labour and administrative overheads as a percentage
of factory cost based on previous year’s cost.
Cost of delivery of the components at customer’s premises is estimated at ` 9,50,000.
(i) CALCULATE the overhead recovery rates based on actual costs for 2020-21.
(ii) PREPARE a Job cost sheet for the order received and the price to be quoted if the desired profit is
25% on sales.
Ans.
(i) Calculation of Overhead Recovery Rate:
Factory Overhead in 2020 - 21
Factory Overhead Recovery Rate = = × 100
Direct labour cost in 2020 - 21
30,80, 000
== × 100 = 34% of Direct labour
90, 50, 000
Administrative Overhead in 2020 - 21

Administrative Overhead Recovery Rate = x 100
Factory cost in 2020 - 21 (W.N)
`20, 50, 400

x 100 = 6.91% of Factory Cost
`2, 96,80, 000
Working Note: Calculation of Factory Cost in 2020-21
Opening Stock of Material 15,00,000
Add: Purchase of Material 1,80,50,000
Less: Closing Stock of Material (20,00,000)
Material Consumed 1,75,50,000
Factory Overhead 30,80,000

(ii) Job Cost Sheet for the order received in 2021-22

Material 80,00,000
Labour 40,50,000
Factory Overhead (34% of ` 40,50,000) 13,77,000
Administrative Overhead (6.91% of ` 1,34,27,000) 9,27,806
Cost of delivery 9,50,000
Add: Profit @ 25% of Sales or 33.33% of cost 51,01,602
Sales value (Price to be quoted for the order) 2,04,06,408
Hence the price to be quoted is ` 2,04,06,408.
Q-30 A construction company has obtained a contract of ` 30 lakhs contract price.
The following details are available in respect of this contract for the year ended March 31, 2021:
Particulars (` )
Materials issued from stores 8,00,000
Wages paid 1,50,000
Plant Supervisor Salary 2,40,000
Drawing and maps 50,000
Sundry expenses 30,000
Electricity charges 40,000
Plant hire expenses paid 75,000
Sub-contract cost 40,000
Materials returned to stores 35,000
The following balances related to the contract for the year ended on March 31, 2020 and March 31, 2021
are available:
As on 31st March, 2020 (`) As on 31st March, 2021 (`)
Work certified 2,50,000 70% of Contract Price
Work uncertified 10,000 ?
Materials at site 35,000 25,000
Wages outstanding 15,000 22,000
Plant hire charges outstanding 20,000 15,000
Further informations are as under:
1. An additional plant was used for 270 days costing ` 5,00,000 with a residual value of ` 20,000 having
life of 4 years.
2. During the year, material costing ` 40,000 was sold for ` 20,000.
3. Plant supervisor has devoted 1/3rd of his time to this contract.
4. As on 31.03-2021, 80% of the contract was completed.
You are required to prepare Contract Account and show the notional profit or loss as on 31st March, 2021
(Assume 360 days in a year).

Ans. Contract A/c

Dr. Cr.
Particulars Amount Particulars Amount
(` ) (` )
To Opening Work in progress By Material returned to store 35,000
- Work certified 2,50,000 By Material returned to suppliers 50,000
- Work uncertified 10,000 2,60,000 By Costing P&L (Loss
on sale of material) 20,000
To Material at site 35,000 By Material Sold 20,000
To Material purchased 2,00,000 By Material at site 25,000
To Stores 8,00,000 By Works cost (Bal. fig.) 17,02,000
To Wages 1,50,000
Add: Closing O/s wages 22,000
Less: Opening O/s wages (15,000) 1,57,000
To Plant supervisor salary 80,000
(2,40,000 × 1/3)
To Drawing and maps 50,000
To Sundry expenses 30,000
To Electricity charges 40,000
To Plant hire expenses 75,000
Add: O/s at end 15,000
Less: O/s at beginning (20,000) 70,000
To Sub-contract 40,000
To Depreciation
90,000
18,52,000 18,52,000
To works cost 17,02,000 By work in progress:
To Costing P& L (Notional profit) 6,10,750 Work certified 21,00,000
________ Work uncertified 2,12,750 23,12,750
23,12,750 23,12,750
Working Note:
Calculation of Value of work uncertifiedCost incurred till date 17,02,000
Estimate total cost [17,02,000/80%] 21,27,500
Cost of work certified till date (21,27,500 ×70%) 14,89,250
Cost of uncertified work (17,02,000 –14,89,250) 2,12,750

Q-31 A contractor prepares his accounts for the year ending 31st March each year. He commenced a contract
on 1st July, 2021.
The following information relates to the contract as on 31st March, 2022:
(`)
Material issued 7,53,000
Wages 16,96,800
Salary to Foreman 2,43,900
A machine costing ` 7,80,000 has been on the site for 146 days, its working life is estimated at 7 years
and its final scrap value at ` 45,000.
A supervisor, who is paid ` 24,000 p.m. has devoted one-half of his time to this contract.
All other expenses and administration charges amount to ` 4,09,500.
Material in hand at site costs ` 1,06,200 on 31st March, 2022.
The contract price is ` 60,00,000. On 31st March, 2022 two-third of the contract was completed. The
architect issued certificates covering 50% of the contract price, and the contractor had been paid `
22,50,000 on account.
PREPARE Contract A/c and show the notional profit or loss as on 31st March, 2022.
Ans. Contract Account
To Material issued 7,53,000 By Machine (Working note 1) 7,38,000
” Wages 16,96,800 ” Material (in hand) 1,06,200
” Foreman’s salary 2,43,900 ” Works cost (balancing figure) 31,47,000
” Machine 7,80,000
” Supervisor’s salary (` 24,000 × 9)/2 1,08,000
” Administrative charges 4,09,500
39,91,200 39,91,200
” Works cost 31,47,000 ” Value of work certified 30,00,000
” Costing P&L A/c 6,39,750 ” Cost of work uncertified
(Notional profit) (Working Note 2) 7,86,750
37,86,750 37,86,750
Working notes:
1. Written down value of Machine:
Hence, the value of machine after the period of 146 days = ` 7,80,000 – ` 42,000 = ` 7,38,000
2. The cost of 2/3rd of the contract is ` 31,47,000
Cost of 50% of the contract which has been certified by the architect is ` 23,60,250. Also, the cost of the
contract, which has been completed but not certified by the architect is ` 7,86,750.

Q-32 The following expenses were incurred on a contract:

(`)
Material drawn from stores 1,20,000
Wages 2,70,000
Plant issued 90,000
Chargeable expenses 90,000
Apportioned indirect expenses 30,000
The contract was for ` 24,00,000 and it commenced on April 1, 2021. The value of the work completed
and certified upto 28th February, 2022 was ` 15,60,000 of which ` 12,48,000 was received in cash, the
balance being held back as retention money by the contractee. The value of work completed subsequent
to the architect’s certificate but before 31st March, 2022 was ` 72,000. There were also lying on the site
materials of the value of ` 48,000. It was estimated that the value of plant as at 31st March, 2022 was `
36,000.
You are required to COMPUTE notional profit on the contract till the year ended 31st March, 2022.
Ans.
Contract Account
To Material purchased 7,20,000 By Work-in-progress:
” Stores issued 1,20,000 Value of work certified 15,60,000
” Wages 2,70,000 Cost of work uncertified 72,000
” Plant 90,000 ” Material unused 48,000
” Chargeable expenses 90,000 ” Plant less depreciation 36,000
” Indirect expenses 30,000
” Costing P&L A/c
(Notional profit) (bal. fig.) 3,96,000 ________
17,16,000 17,16,000
Q-33 R Ltd. showed a Net Profit of ` 3,60,740 as per their cost accounts for the year ended 31st March, 2021.
The following information was revealed as a result of scrutiny of the figures from the both sets of
accounts:
Sr. Particulars (` )
No.
i. Over recovery of selling overheads in cost accounts 10,250
ii. Over valuation of closing stock in cost accounts 7,300
iii. Rent received credited in financial accounts 5,450
iv. Bad debts provided in financial accounts 3,250
v. Income tax provided in financial accounts 15,900
vi. Loss on sale of capital asset debited in financial accounts 5,800
vii. Under recovery of administration overheads in cost accounts 3,600

Required:
Prepare a reconciliation statement showing the profit as per financial records.
Ans. Statement of Reconciliation
(` ) (` )
Net Profit as per Cost Accounts 3,60,740
Add:
Over recovery of selling overheads in cost accounts 10,250
Rent received credited in financial accounts 5,450 15,700
376,440
Less:
Over valuation of closing stock in cost accounts 7,300
Bad debts provided in financial accounts 3,250
Income tax provided in financial accounts 15,900
Loss on sale of capital asset debited in financial accounts 5,800
Under recovery of administration overheads in cost accounts 3,600 35,850
Profit as per Financial Accounts 3,40,590
---0---0---

CHAPTER- 10
PROCESS & OPERATION COSTING
Q-1 Star Ltd. manufactures chemical solutions for the food processing industry. The manufacturing takes
place in a number of processes and the company uses FIFO method to value work-in-process and
finished goods. At the end of the last month, a fire occurred in the factory and destroyed some of
papers containing records of the process operations for the month.
Star Ltd. needs your help to prepare the process accounts for the month during which the fire occurred.
You have been able to gather some information about the month’s operating activities but some of the
information could not be retrieved due to the damage. The following information was salvaged:
• Opening work-in-process at the beginning of the month was 1,600 litres, 70% complete for labour
and 60% complete for overheads. Opening work-in-process was valued at ` 1,06,560.
• Closing work-in-process at the end of the month was 320 litres, 30% complete for labour and 20%
complete for overheads.
• Normal loss is 10% of input and total losses during the month were 1,200 litres partly due to the
fire damage.
• Output sent to finished goods warehouse was 8,400 litres.
• Losses have a scrap value of ` 15 per litre.
• All raw materials are added at the commencement of the process.
• The cost per equivalent unit (litre) is ` 78 for the month made up as follows:
(`)
Raw Material 46
Labour 14
Overheads 18
78
Required:
(i) CALCULATE the quantity (in litres) of raw material inputs during the month.
(ii) CALCULATE the quantity (in litres) of normal loss expected from the process and the quantity (in
litres) of abnormal loss / gain experienced in the month.
(iii) CALCULATE the values of raw material, labour and overheads added to the process during the
month.
(iv) PREPARE the process account for the month.

Ans.(i) Calculation of Raw Material inputs during the month:

Quantities Entering Process Litres Quantities Leaving Process Litres
Opening WIP 1,600 Transfer to Finished Goods 8,400
Raw material input (balancing figure) 8,320 Process Losses 1,200
Closing WIP 320 _____
9,920 9,920
(ii) Calculation of Normal Loss and Abnormal Loss/Gain
Litres
Total process losses for month 1,200
Normal Loss (10% input) 832
Abnormal Loss (balancing figure) 368
(iii) Calculation of values of Raw Material, Labour and Overheads added to the process:
Material Labour Overheads
Cost per equivalent unit `46.00 ` 14.00 ` 18.00
Equivalent units (litre) (refer the working note) 7,488 7,744 7,872
Cost of equivalent units ` 3,44,448 ` 1,08,416 ` 1,41,696
Add: Scrap value of normal loss (832 units × `15) ` 12,480 — —
Total value added ` 3,56,928 ` 1,08,416 ` 1,41,696
Workings:
Statement of Equivalent Units (litre):
Equivalent Production
Input Details Units Output details Units Material Labour Overheads
Units (%) Units (%) Units (%)
Opening WIP 1,600 Units completed:
Units
introduced 8,320 - Opening WIP 1,600 — — 480 30 640 40
- Fresh inputs 6,800 6,800 100 6,800 100 6,800 100
Normal loss 832 — — — — — —
Abnormal loss 368 368 100 368 100 368 100
_____ Closing WIP 320 320 100 96 30 64 20
9,920 9,920 7,488 7,744 7,872
(iv) Process Account for the month Litres
Amount (`) Litres Amount (`)
To Opening WIP 1,600 1,06,560 By Finished goods
[8400 x ` 78] 8,400 6,55,200
To Raw Materials 8,320 3,56,928 By Normal loss
[832 x ` 15] 832 12,480
To Wages — 1,08,416 By Abnormal loss
[368 x ` 78] 368 28,704
To Overheads — 1,41,696 By Closing WIP
[(320 x ` 46) + (320
x .30 x ` 14) + (320
_____ ______ x .20 x ` 18)] 320 17,216
9,920 7,13,600 9,920 7,13,600
-312- Chapter-10 : Process & Operation Costing

Q-2 Following information is available regarding process A for the month of February, 20X9:
Production Record:
Units in process as on 01.02.20X9 4,000
(All materials used, 25% complete for labour and overhead)
New units introduced 16,000
Units completed 14,000
Units in process as on 28.02.20X9 6,000
(All materials used, 33-1/3% complete for labour and overhead)
Cost Records:
Work-in-process as on 01.02.20X9 (`)
Materials 6,00,000
Labour 1,00,000
Overhead 1,00,000
8,00,000
Cost during the month
Materials 25,60,000
Labour 15,00,000
Overhead 15,00,000
55,60,000
Presuming that average method of inventory is used, PREPARE:
(i) Statement of Equivalent Production.
(ii) Statement showing Cost for each element.
(iii) Statement of Apportionment of cost.
(iv) Process Cost Account for Process A.
Ans.
(i) Statement of Equivalent Production (Average cost method)
Input Particulars Output Units Equivalent Production
(Units) Materials Labour Overheads
(%*) Units** (% )* Units** (%)* Units**
20,000 Completed 14,000 100 14,000 100 14,000 100 14,000
WIP 6,000 100 6,000 33-1/3 2,000 33-1/3 2,000
20,000 20,000 20,000 16,000 16,000
*Percentage of completion ** Equivalent units
(ii) Statement showing Cost for each element
Particulars Materials Labour Overhead Total
Cost of opening work-in- 6,00,000 1,00,000 1,00,000 8,00,000
progress (`)
Cost incurred during the month (`) 25,60,000 15,00,000 15,00,000 55,60,000
Total cost (`) : (A) 31,60,000 16,00,000 16,00,000 63,60,000
Equivalent units : (B) 20,000 16,000 16,000
Cost per equivalent unit (`) : C= (A ÷ B) 158 100 100 358

(iii) Statement of Apportionment of cost

(`) (`)
Value of output transferred: (A) (14,000 units × ` 358) 50,12,000
Value of closing work-in-progress: (B)
Material (6,000 units × `158) 9,48,000
Labour (2,000 units × ` 100) 2,00,000
Overhead (2,000 units × ` 100) 2,00,000 13,48,000
Total cost : (A + B) 63,60,000
(iv) Process- A Account
Particulars Units (`) Particulars Units (`)
To Opening WIP 4,000 8,00,000 By Completed units 14,000 50,12,000
To Materials 16,000 25,60,000 By Closing WIP 6,000 13,48,000
To Labour 15,00,000
To Overhead ______ 15,00,000 ______ ________
20,000 63,60,000 20,000 63,60,000
Q-3 A product is manufactured in two sequential processes, namely Process-1 and Process-2. The following
information relates to Process-1. At the beginning of June 2019, there were 1,000 WIP goods (60%
completed in terms of conversion cost) in the inventory, which are valued at `2,86,020 (Material cost:
`2,55,000 and Conversion cost: `31,020). Other information relating to Process-1 for the month of June
2019 is as follows;
Cost of materials introduced- 40,000 units (`) 96,80,000
Conversion cost added (`) 18,42,000
Transferred to Process-2 (Units) 35,000
Closing WIP (Units) (60% completed in terms of conversion cost) 1,500
100% of materials are introduced to Process-1 at the beginning. Normal loss is estimated at 10% of
input materials (excluding opening WIP).
Required:
(i) PREPARE a statement of equivalent units using the weighted average cost methodand thereby
calculate the following:
(ii) CALCULATE the value of output transferred to Process-2 and closing WIP.
Ans. (i) Statement of Equivalent Production
Particulars Input Particulars Output Equivalent Production
Units Units Material Conversion
cost
% Units % Units
Opening WIP 1,000 Completed and transfer
red to Process-2 35,000 100 35,000 100 35,000
Units intro
duced 40,000 Normal Loss
(10% of 40,000) 4,000 — — — —
Abnormal loss
(Balancing figure) 500 100 500 60 300
______ Closing WIP 1,500 100 1,500 60 900
41,000 41,000 37,000 36,200

(ii) Calculation of value of output transferred to Process-2 & Closing WIP

1. Value of units completed and transferred
(35,000 units × ` 320.25) (Refer working note) 1,12,08,750
3. Value of Closing W-I-P:
- Materials (1,500 units × ` 268.51) 4,02,765
- Conversion cost (900 units × ` 51.74) 46,566 4,49,331
Workings:
Cost for each element
Particulars Materials(`) Conversion(`) Total(`)
Cost of opening work-in-process 2,55,000 31,020 2,86,020
Cost incurred during the month 96,80,000 18,42,000 1,15,22,000
Total cost: (A) 99,35,000 18,73,020 1,18,08,020
Equivalent units: (B) 37,000 36,200 ________
Cost per equivalent unit: (C) = (A ÷ B) 268.51 51.74 320.25
Q-4 From the following information for the month of January, 20X9, PREPARE Process-III cost accounts.
Opening WIP in Process-III 1,600 units at ` 24,000
Transfer from Process-II 55,400 units at ` 6,23,250
Transferred to warehouse 52,200 units
Closing WIP of Process-III 4,200 units
Units Scrapped 600 units
Direct material added in Process-III ` 2,12,400
Direct wages ` 96,420
Production overheads ` 56,400
Degree of completion:
Opening Stock Closing Stock Scrap
Material 80% 70% 100%
Labour 60% 50% 70%
Overheads 60% 50% 70%
The normal loss in the process was 5% of the production and scrap was sold @ ` 5 per unit.
(Students may treat material transferred from Process – II as Material – A and fresh material used in
Process – III as Material B)
Ans. Statement of Equivalent Production
Process III
Input Output Units Material-A Material-B Labour &
Details Units Particulars Overhead
% Units % Units % Units
Opening 1,600 Work on Op. WIP 1,600 - - 20 320 40 640
WIP
Process-II 55,400 Introduced & 50,600 100 50,600 100 50,600 100 50,600
Transfer completed during
the month
Normal loss (5% 2,640 - - - - - -
of 52,800 units)
Closing WIP 4,200 100 4,200 70 2,940 50 2,100
______ Abnormal Gain (2,040) 100 (2,040) 100 (2,040) 100 (2,040)
57,000 57,000 52,760 51,820 51,300

Working note:
Production units = Opening units + Units transferred from Process-II – Closing Units
= 1,600 units + 55,400 units – 4,200 units = 52,800 units
Statement of Cost
Cost (`) Equivalent Cost per
units equivalent
units (`)
Material A (Transferred from previous process) 6,23,250
Less: Scrap value of normal loss (2,640 units × ` 5) (13,200)
6,10,050 52,760 11.5627
Material B 2,12,400 51,820 4.0988
Labour 96,420 51,300 1.8795
Overheads 56,400 51,300 1.0994
9,75,270 18.6404
Statement of apportionment of Process Cost
Opening WIP Material A 24,000
Completed opening Material B (320 units × ` 4.0988) 1311.62
WIP units-1600
Wages (640 units × ` 1.8795) 1202.88
Overheads (640 units × ` 1.0994) 703.62 3,218.12
Introduced & 50,600 units × ` 18.6404 9,43,204.24
Completed-50,600 units
Total cost of 52,200 9,70,422.36
finished goods units
Closing WIP units- 4,200 Material A (4,200 units × ` 11.5627) 48,563.34
Material B (2,940 units × ` 4.0988) 12,050.47
Wages (2,100 units × ` 1.8795) 3,946.95
Overheads (2,100 units × ` 1.0994) 2,308.74
66,869.50
Abnormal gain units - 2,040 (2,040 units × ` 18.6404) 38026.42
Process III A/c
Particulars Units Amount (`) Particulars Units Amount (`)
To Balance b/d 1,600 24,000 By Normal loss 2,640 13,200
To Process II A/c 55,400 6,23,250 By Finished goods 52,200 9,70,422.36
To Direct material 2,12,400 By Closing WIP 4,200 66,874.06*
To Direct wages 96,420
To Production overheads 56,400
To Abnormal gain 2,040 38,026.42 ______ ___________
59,040 10,50,496.42 59,040 10,50,496.42
* Difference in figure due to rounding off has been adjusted with closing WIP.

Q-5 Star Ltd. manufactures chemical solutions for the food processing industry. The manufacturing takes
place in a number of processes and the company uses FIFO method to value work-in-process and
finished goods. At the end of the last month, a fire occurred in the factory and destroyed some of paper
containing records of the process operations for the month.
Star Ltd. needs your help to prepare the process accounts for the month during which the fire occurred.
You have been able to gather some information about the month’s operating activities but some of the
information could not be retrieved due to the damage. The following information was salvaged:
• Opening work-in-process at the beginning of the month was 800 litres, 70% complete for labour and
60% complete for overheads. Opening work-in-process was valued at ` 26,640.
• Normal loss is 10% of input and total losses during the month were 1,800 litres partly due to the fire
damage.
• Losses have a scrap value of `15 per litre.
• The cost per equivalent unit (litre) is `39 for the month made up as follows:
(` )
Raw Material 23
Labour 7
Overheads 9
39
Required:
(i) Calculate the quantity (in litres) of raw material inputs during the month.
(ii) Calculate the quantity (in litres) of normal loss expected from the process and the quantity (in
(iii) Calculate the values of raw material, labour and overheads added to the process during the
month.
(v) PREPARE the process account for the month.
Ans.
(i) Calculation of Raw Material inputs during the month:
Quantities Entering Litres Quantities Leaving Process Litres
Process
Opening WIP 800 Transfer to Finished Goods 4,200
Raw material input 5,360 Process Losses 1,800
(balancing figure)
_____ Closing WIP 160
6,160 6,160
Litres
Abnormal Loss (balancing figure) 1,264

Cost per equivalent unit ` 23.00 ` 7.00 ` 9.00
Equivalent units (litre) 4,824 4,952 5,016
(refer the working note)
Cost of equivalent units ` 1,10,952 ` 34,664 ` 45,144
Add: Scrap value of normal loss
(536 units × ` 15) ` 8,040 -- --
Total value added ` 1,18,992 `34,664 ` 45,144
Workings:
Input Units Output details Units Material Labour Overheads
Details Units (%) Units (%) Units (%)
Opening 800 Units completed:
WIP 5,360 - Opening 800 -- -- 240 30 320 40
Units WIP
introduced - Fresh inputs 3,400 3,400 100 3,400 100 3,400 100
Normal loss 536 -- -- -- -- -- --
Abnormal loss 1,264 1,264 100 1,264 100 1,264 100
______ Closing WIP 160 160 100 48 30 32 20
6,160 6,160 4,824 4,952 5,016
(iv) Process Account for Month
Litres Amount Litres Amount
(` ) (` )
To Opening WIP 800 26,640 By Finished goods 4,200 1,63,800
To Raw Materials 5,360 1,18,992 By Normal loss 536 8,040
To Wages -- 34,664 By Abnormal loss 1,264 49,296
To Overheads -- 45,144 By Closing WIP 160 4,304
6,160 2,25,440 6,160 2,25,440
Q-6 A product passes through two distinct processes before completion. Following information are available
in this respect:
Process-1 Process 2
Raw materials used 10000 units -
Raw material cost (per unit) ` 75 -
Transfer to next process/Finished good 9000 units 8200 units
Normal loss (on inputs) 5% 10%
Direct wages ` 3,00,000 ` 5,60,000
Direct expenses 50% of direct wages 65% of direct wages
Manufacturing overheads 25% of direct wages 15% of direct wages
Realisable value of scrap (per unit) ` 13.50 ` 145
8000 units of finished goods were sold at a profit of 15% on cost. There was no opening and closing
stock of work-in-progress.

Prepare:
(i) Process-1 and Process-2 Account
(ii) Finished goods Account
(iii) Normal Loss Account
(iv) Abnormal Loss Account
(v) Abnormal Gain Account
Ans. (i)
Dr. Process-1 Account Cr.
Particulars Units Total (`) Particulars Units Total (`)
To Raw Material 10,000 7,50,000 By Normal Loss A/c
Consumed @ 13.5 500 6,750
” Direct Wages — 3,00,000 ” Process 2 @ 133.5 9,000 12,01,500
” Direct — 1,50,000 ” By Abnormal 500 66,750
Expenses Loss @ 133.5
“ Manufacturing
Overheads _____ 75,000 _____ ________
10,000 12,75,000 10,000 12,75,000
Cost per unit of completed units and abnormal loss:
` 12,75,00 - ` 6,750
= = ` 133.5
10,000 units - 50 units
(ii)
Dr. Process-2 Account Cr.
To Process-I A/c 9,000 12,01500 By Normal Loss A/c @ 145 900 1,30,500
” To Direct Wages — 5,60,000 ” By Finished Stock A/c
[bal fig] 8,200 21,04,667
” Direct Expenses — 3,64,000
” Manufacturing
Overheads — 84,000
” To Abnormal gain
(` 256.67 × 100 units) 100 25,667 _____ ________
9,100 22,35,167 9,100 22,35,167
Cost per unit of completed units and abnormal gain:
` 22,09,500 - ` 130500
= ` 256.67
8,100 units
Dr. Finished Goods A/c Cr.
To Process II A/c 8,200 21,04,667 By By Cost of Sales 8,000 20,53,333
” By Balance c/d 200 51,334 _____ ______
8,200 21,04,667 8,200 21,04,667

(iii) Normal Loss A/c

Dr. Cr.
To Process I 500 6,750 By By abnormal Gain II 100 14,500
Process II 900 1,30,500 By Cash 500 6,750
___ ______ By Cash 800 1,16,000
1400 1,37,250 1400 1,37,250
(iv) Abnormal Loss A/c
Dr. Cr.
To Process I 500 66,750 By By Cost Ledger
Control A/c 500 6,750
By Costing P& L A/C
______ ______ (Abnormal Loss) 60,000
66,750 66,750
(v) Abnormal Gain A/c
Dr. Cr.
To Normal Loss A/c @ 145100 14,500 ByProcess II 100 25,667
To Costing P & L A/C ___ 11,167 ___ _____
100 25,667 100 25,667
Q-7 KT Ltd. produces a product EMM which passes through two processes before it is completed and
transferred to finished stock. The following data relate to May 2019:
Particulars Process Finished stock
A (`) B (`) (`)
Opening Stock 5,000 5,500 10,000
Direct Materials 9,000 9,500
Direct Wages 5,000 6,000
Factory Overheads 4,600 2,030
Closing Stock 2,000 2,490 5,000
Inter-process profit included in opening stock 1,000 4,000
Output of Process A is transferred to Process B at 25% profit on the transfer price and output of Process
B is transferred to finished stock at 20% profit on the transfer price.
Stock in process is valued at prime cost. Finished stock is valued at the price at which it is received from
Process B. Sales during the period are ` 75,000.
Prepare the Process cost accounts and Finished stock account showing the profit element at each
stage.
Ans.
Process-A A/c
Particulars Total(`) Cost(`) Profit(`) Particulars Total(`) Cost(`) Profit(`)
Opening stock 5,000 5,000 _ Process BA/c 28,800 21,600 7,200
Direct materials 9,000 9,000 _
Direct wages 5,000 5,000 _

19,000 19,000 _
Less: Closingstock (2,000) (2,000) _
Prime Cost 17,000 17,000 _
Overheads 4,600 4,600 _
Process Cost 21,600 21,600 _
Profit (33.33%
of total cost) 7,200 - 7,200
28,800 21,600 7,200 28,800 21,600 7,200
Process-B A/c
Opening stock 5,500 4,500 1,000 Finished
stock A/c 61,675 41,550 20,125
Process A A/c 28,800 21,600 7,200
Direct materials 9,500 9,500 _
Direct wages 6,000 6,000 _
49,800 41,600 8,200
Less: Closing stock (2,490) (2,080) (410)
Prime Cost 47,310 39,520 7,790
Overheads 2,030 2,030 _
Process Cost 49,340 41,550 7,790
Profit (25%
of total cost) 12,335 - 12,335
61,675 41,550 20,125 61,675 41,550 20,125
Finished Stock A/c
Opening stock 10,000 6,000 4,000 Costing
P & L A/c 75,000 44,181 30,819
Process B A/c 61,675 41,550 20,125
71,675 47,550 24,125
Less: Closing stock (5,000) (3,369) (1,631)
COGS 66,675 44,181 22,494
Profit 8,325 - 8,325
75,000 44,181 30,819 75,000 44,181 30,819
Q-8 Following details have been provided by M/s AR Enterprises:
(i) Opening works-in-progress - 3000 units (70% complete)
(ii) Units introduced during the year - 17000 units
(iii) Cost of the process (for the period) - ` 33,12,720
(iv) Transferred to next process - 15000 units
(v) Closing works-in-progress - 2200 units (80% complete)
(vi) Normal loss is estimated at 12% of total input (including units in process in the beginning). Scraps
realise ` 50 per unit. Scraps are 100% complete.
Using FIFO method, compute:
(i) Equivalent production
(ii) Cost per equivalent unit

Ans.
Statement of Equivalent Production Units (Under FIFO Method)
Particulars Input Particulars Output Equivalent
units units Production
(%) Equivalent
units
Opening W-I-P 3,000 From opening W-I-P 3,000 30 900
Units introduced 17,000 From fresh inputs 12,000 100 12,000
Units completed
(Transferred to next process) 15,000
Normal Loss
{12% (3,000 + 17,000 units)} 2,400 -- --
Closing W-I-P 2,200 80 1760
_____ Abnormal loss (Balancing figure) 400 100 400
20,000 11,000 15,060
Computation of cost per equivalent production unit :
Cost of the Process (for the period) ` 33,12,720
Less: Scrap value of normal loss (` 50 × 2,400 units) (` 1,20,000)
Total process cost ` 31,92,720
Q-9 Alpha Ltd. is engaged in the production of a product A which passes through 3 different process -
Process P, Process Q and Process R. The following data relating to cost and output is obtained from the
books of accounts for the month of April 2017:
Particulars Process P Process Q Process R
Direct Material 38,000 42,500 42,880
Direct Labour 30,000 40,000 50,000
Production overheads of ` 90,000 were recovered as percentage of direct labour.
10,000 kg of raw material @ ` 5 per kg. was issued to Process P. There was no stock of materials or work
in process. The entire output of each process passes directly to the next process and finally to warehouse.
There is normal wastage, in processing, of 10 %.
The scrap value of wastage is ` 1 per kg. The output of each process transferred to next process and
finally to warehouse are as under:
Process P = 9,000 kg
Process Q = 8,200 kg
Process R = 7,300 kg
The company fixes selling price of the end product in such a way so as to yield a profit of 25% selling
price.
Prepare Process P, Q and R accounts. Also calculate selling price per unit of end product.

Ans. Process- P Account

Particulars Kg. Amount Particulars Kg. Amount
(`) (`)
To Input 10,000 50,000 By Normal wastage 1,000 1,000
(1,000 kg. × ` 1)
To Direct Material — 38,000 By Process- Q 9,000 1,39,500
(9,000 kg. × ` 15.50)
To Direct Labour — 30,000
To Production OH — 22,500
(` 90,000 × 3/12) ______ _______ ______ _______
10,000 1,40,500 10,000 1,40,500
` 1,40,500 - ` 1,000
Cost per unit = = ` 15.50
10,000 kg. - 1,000 kg.
Process- Q Account
(` ) (` )
To Process-P A/c 9,000 1,39,500 By Normal wastage
(900 kg. × ` 1) 900 900
To Direct Material — 42,500 By Process- Q 8,200 2,54,200
(8,200 kg. × ` 31)
To Direct Labour — 40,000
To Production OH — 30,000
(` 90,000 × 4/12)
To Abnormal Gain 100 3,100
(100 kg. × ` 31) _____ _______ _____ _______
9,100 2,55,100 9,100 2,55,100
` 2,52,000 - ` 900
Cost per unit =
9,000 kg. - 900 kg.
Process- R Account
(` ) (` )
To Process-Q A/c 8,200 2,54,200 By Normal wastage 820 820
(820 kg. × Re.1)
To Direct Material — 42,880 By Abnormal loss 80 4,160
(80 kg. × ` 52)
To Direct Labour — 50,000 By Finished Goods 7,300 3,79,600
(7,300 kg. × `52)
To Production OH
(` 90,000 × 5/12) — 37,500 _____ _______
8,200 3,84,580 8,200 3,84,580

` 3,84,580 -` 820
Cost per unit =  ` 52
8,200 kg. - 820 kg.
Calculation of Selling price per unit of end product:
Cost per unit ` 52.00
Add: Profit 25% on selling price i.e. 1/3rd of cost ` 17.33
Selling price per unit ` 69.33
Q-10 A ditya Agro Ltd. mixes powdered ingredients in two different processes to produce one product.
The output of Process- I becomes the input of Process -II and the output of Process-II is transferred to
the Packing department.
From the information given below, you are required to PREPARE accounts for Process-I , Process-II and
A bnormal loss/ gain A/c to record the transactions for the month of February 20X9.
Process-I
Input:
Material A 6,000 kilograms at Rs. 50 per kilogram
Material B 4,000 kilograms at Rs. 100 per kilogram
Labour 430 hours at Rs. 50 per hour
Normal loss 5% of inputs. Scrap are disposed off at Rs.16 per kilogram
Output 9,200 kilograms.
There is no work- in- process at the beginning or end of the month.
Process-II
Input:
Material C 6,600 kilograms at Rs. 125 per kilogram
Material D 4,200 kilograms at Rs. 75 per kilogram
Flavouring Essence Rs. 3, 300
Labour 370 hours at Rs.50 per hour
Normal loss 5% of input s with no disposal value
Output 18,000 kilograms.
There is no work-in-process at the beginning of the month but 1,000 kilograms in process at the end of
the month and estimated to be only 50% complete so far as labour and overhead were concerned.
Overhead of Rs. 92 ,000 incurred to be abso rbed on the basis of labour hours.
Ans.
Process-I A/c
Particulars Qty. Amount Particulars Qty. Amount
(kgs) (kgs) ( Rs.)
To Material A 6,000 3,00,000 By Normal loss 500 8,000
To Material B 4,000 4,00,000 By Process-II A/c 9,200 7,38,857
To Labour - 21,500 By Abnormal loss A/c 300 24,093
To Overhead -- 49,450
Rs. 92,000  430 hrs
______ _______ _____ _______
800 hrs
10,000 7,70,950 10,000 7,70,950
{(` 3,00, 000 + ` 4, 00, 000 + `21,500 + ` 49,450) - ` 8,000} ` 7,70,950 - ` 8, 000
* = = Rs.80.3105
(10,000 - 500)units 9,500 units

Process-II A/c
Particulars Qty. Amount Particulars Qty. (kgs) Amount
(kgs) ( Rs.) ( Rs.)
To Process-I A/c 9,200 7,38,857 By Normal loss 1,000 --
To Material C 6,600 8,25,000 By Packing 18,000 18,42,496
Dept. A/c
(See the working notes)
To Material D 4,200 3,15,000 By WIP A/c 1,000 1,00,711
(See the working notes)
To Flavouring essence -- 3,300
To Labour -- 18,500
To Overheads -- 42,550
 Rs. 92, 000 - 370 hrs 

  ______ ________ ______ _______
 800 hrs 
20,000 19,43,207 20,000 19,43,207
Abnormal loss A/c
Particulars Qty. Amount Particulars Qty. Amount
(kgs) ( Rs.) (kgs) ( Rs.)
T o Process-I A/c 300 24,093 By Bank 300 4,800
By Costing
___ ______ Profit & Loss A/c -- 19,293
300 24,093 300 24,093
Working Notes:
Calculation of Equivalent Production units
Input Units Output Units Process-I Mat-C & D Labour & OH
(%) Units (%) Units (%) Units
9,200 Transferred to Packing. 18,000 100 18,000 100 18,000 100 18,000
Mat-C 6,600 Closing WIP 1,000 100 1,000 100 1,000 50 500
Mat-D 4,200 Normal loss 1,000 -- -- -- -- -- --
20,000 20,000 19,000 19,000 18,500
Calculation of Unit cost
Cost component Amount (Rs.) Equivalent units Cost per unit
( Rs.)
Transferred-in 7,38,857 19,000 38.8872
Material-C 8,25,000 19,000 43.4211
Material-D 3,15,000 19,000 16.5789
Flavouring essence 3,300 19,000 0.1737
T otal Material Cost 18,82,157 19,000 99.0609
Labour 18,500 18,500 1.0000
Overheads 42,550 18,500 2.3000
Total Cost 19,43,207 102.3609

Value of Materials transferred to Packing Department

= 18,000 unit × Rs.102.3609 = 18,42,496
Value of WIP : For Materials- 1,000 units × Rs.99.0609 = Rs.99,061
For Labour & Overheads 500 units × Rs.3.30 = Rs.1,650
Rs.1,00,711
Q-11 The following data are available in respect of Process-I for January 20X9:
(1) Opening stock of work in process: 600 units at a total cost of Rs. 4,20 ,000.
(2) Degree of completion of opening work in process:
Material 100%
Labour 60%
Overheads 60%
(3) Input of materials at a total cost of Rs.55,20 ,000 for 9,200 units.
(4) Direct wages incurred Rs.18,60,000
(5) Production overhead Rs.8,63,000.
(6) Units scrapped 200 units. T he stage of completion of these units was:
Materials 100%
Labour 80%
Overheads 80%
(7) Closing work in process; 700 units. T he stage of completion of these units was:
Material 100%
Labour 70%
Overheads 70%
(8) 8,900 units were completed and transferred to the next process.
(9) Normal loss is 4% of the total input (opening stock plus units put in)
(10) Scrap value is Rs.60 per unit.
(i) Compute equivalent production,
(ii) Calculate the cost per equivalent unit for each element.
(iii) Calculate the cost of abnormal loss (orgain), closing work in process a nd the units transferred to the
next p rocess using the FIFO method.
Ans.
(i) Statement of Equivalent Production (FIFO Method)
Input Output Equivalent Production
Materials Labour Production
Overhead
Details Units Details Units % Units % Units % Units
Opening 600 From opening 600 - - 40 240 40 240
Stock stock
- From fresh 8,300 100 8,300 100 8,300 100 8,300
materials
Closing W-I-P 700 100 700 70 490 70 490
Fresh inputs 9,200 Normal loss 392 - - - - - -
9,992 9,000 9,030 9,030
Less: Abnormal (192) 100 (192) 100 (192) 100 (192)
Gain
9,800 9,800 8,808 8,838 8,838

(ii) Statement of Cost per equivalent units

Elements Cost Equivalent units Cost per
(EU) EU
(Rs.) (Rs.) (Rs.)
Material Cost 55,20,000
Less: Scrap realisation 392 (2,3520) 54,96,480 8,808 624.03
units @ Rs. 60/ - p.u. _______
Labour cost 18,60,000 8,838 210.45
Production OH Cost 8,63,000 8,838 97.65
Total Cost 82,19,480 932.13
(iii) Cost of Abnormal Gain – 192 Units

(Rs.) (Rs.)
Material cost of 192 units @ Rs. 624.03 p.u. 1,19,813.76
Labour cost of 192 units @ Rs. 210.45 p.u. 40,406.40
Production OH cost of 192 units @ Rs. 97.65 p.u. 18,748.80 1,78,968.96
Cost of closing WIP – 700 Units
Material cost of 700 equivalent units @ Rs. 624.03 p.u. 4,36,821.00
Labour cost of 490 equivalent units @ Rs. 210.45 p.u. 1,03,120.50
Production OH cost of 490 equivalent @ Rs. 97.65 p.u. 47,848.50 5,87,790.00
Cost of 8,900 units transferred to next process
(i) Cost of opening W-I-P Stock b/f – 600 units 4,20,000.00
(ii) Cost incurred on opening W-I-P stock
Material cost —
Labour cost 240 equi valent units @ Rs. 210.45 p.u. 50,508.00
Production OH cost 240 equi valent units @ Rs 97.65 p.u . 23,436.00
4,93,944.00
(iii) Cost of 8,300 completed units
8,300 units @ Rs. 932.13 p.u. 77,36,679.00
Total cost [(i ) + (ii) + (iii))] 86,50,623.00
Q-12 The following are the details in respect of Process A and Process B of a processing factory:
Process A (`) Process B (`)
Materials 40,000 --
Labour 40,000 56,000
Overheads 16,000 40,000
The output of Process A is transferred to Process B at a price calculated to give a profit of 20% on the
transfer price and the output of Process B is charged to finished stock at a profit of 25% on the transfer
price. The finished stock department realized ` 4,00,000 for the finished goods received from Process
B.
PREPARE process accounts and CALCULATE total profit, assuming that there was no opening or closing
work-in-progress.

Ans. Process A Account

Dr. Cr.
` `
To Materials 40,000 By Process B A/c 1,20,000
(Transfer to Process B)
To Labour 40,000
To Overheads 16,000
96,000
To Profit (20% of transfer price, i.e., 25%
of cost) 24,000 _______
1,20,000 1,20,000
Process B Account
Dr. Cr.
` `
To Process A A/c 1,20,000 By Finished Stock A/c
(Transferred from Process A) (Transfer to finished stock) 2,88,000
To Labour 56,000
To Overhead 40,000
2,16,000
To Profit (25% of transfer price i.e.,
33.33% of cost) 72,000 ________
2,88,000 2,88,000
Statement of Total Profit
`
Profit from Process A 24,000
Profit from Process B 72,000
Profit on Sales (` 4,00,000 – ` 2,88,000) 1,12,000
Total Profit 2,08,000
Q-13 The M-Tech Manufacturing Company is presently evaluating two possible processes for the manufacture
of a toy. The following information is available:
Particulars Process A (Rs.) Process B (Rs.)
Variable cost per unit 12 14
Sales price per unit 20 20
Total fixed costs per year 30,00,000 21,00,000
Capacity (in units) 4,30,000 5,00,000
Anticipated sales (Next year, in units) 4,00,000 4,00,000
Suggest :
1. Which process should be chosen?
2. Would you change your answer as given above, if you were informed that the capacities of the two
processes are as follows:
A - 6,00,000 units; B - 5,00,000 units? STATE the reason?
Ans.
(1) Comparative Profitability Statements
Particulars Process- A (Rs.) Process- B (Rs.)
Selling Price per unit 20.00 20.00
Less: Variable Cost per unit 12.00 14.00
Contribution per unit 8.00 6.00
Total Contribution 32,00,000 24,00,000

(Rs. 8 × 4,00,000) (Rs. 6 × 4,00,000)

Less: Total fixed costs 30,00,000 21,00,000
Profit 2,00,000 3,00,000
*Capacity (units) 4,30,000 5,00,000
Total Contribution at full capaci ty 34,40,000 30,00,000
(Rs. 8 × 4,30,000) (Rs. 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 4,40,000 9,00,000
Process- B should be chosen as it gives more profit as compared to Process-A.
(2)
Particulars Process- A (Rs.) Process- B (Rs.)
*Capacity (units) 6,00,000 5,00,000
Total contribution 48,00,000 30,00,000
(Rs. 8 × 6,00,000) (Rs. 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 18,00,000 9,00,000
If the capacity of the Process A and B is 6,00,000 units and 5,00,000 units respectively then Process-A is
giving double profit than Process C. Thus Process A be chosen.
*Note: It is assumed that capacity produced equals sales.
Q-14 The following information relate to Process A:
(i) Opening Work-in-Process 8,000 units at Rs.15,00,000
Degree of Completion: Material 100%
Labour and Overhead 60%
(ii) Input 1,82,000 units at Rs.1,47,50,000
(iii) Wages paid Rs.68,12,000
(iv) Overheads paid Rs.34,06,000
(v) Units scrapped 14,000
Wages and Overheads 80%
(vi) Closing Work - in- Process 18,000 units
(vii) Units completed and transferred to next process 1,58,000 units
(viii) Normal loss 10% of total input including opening WIP
(ix) Scrap value is Rs.15 per unit to be adjusted out of direct material cost
You are required to COMPUTE on the basis of FIFO
(i) Equivalent Production
(ii) Cost per unit
(iii) Value of units transferred to next process.


(FIFO Method)
Particulars Units Particulars Units Material Labour & Overheads
(%) Units (%) Units
Opening WIP 8,000 Transfer to
next
Process:
Introduced 1,82,000 Opening
WIP
completed 8,000 — — 40 3,200
Introduced
& completed 1,50,000 100 1,50,000 100 1,50,000
Normal loss
10%
(8,000 + 182,000) 19,000 — — — —
Abnormal gain (5,000) 100 (5,000) 100 (5,000)
________ Closing WIP 18,000 100 18,000 70 12,600
1,90,000 1,90,000 1,63,000 1,60,800
(ii) Computation of Cost per unit

Particulars Materials (`) Labour (`) Overhead (`)
Input of Materials 1,47,50,000 — —
Expenses — 68,12,000 34,06,000
Total 1,47,50,000 68,12,000 34,06,000
Less: Sale of Scrap
(19,000 units × ` 15) (2,85,000) — —
Net cost 1,44,65,000 68,12,000 34,06,000
Equivalent Units 1,63,000 1,60,800 1,60,800
Cost Per Unit 88.7423 42.3632 21.1816
Total cost per unit = ` (88.7423 + 42.3632 + 21.1816) = ` 152.2871
(iii) Value of units transferred to next process:
Opening W-I-P 15,00,000.00
Add: Labour (3,200 units × ` 42.3632) 1,35,562.24
Overhead (3,200 units × ` 21.1816) 67,781.12 17,03,343.36
New introduced (1,50,000 units × ` 152.2871) 2,28,43,065.00
2,45,46,408.36

Q-15 The following information relate to Process A:

(i) Opening Work-in-Progress 8,000 units at Rs. 75,000
Labour and Overhead 60%
(ii) Input 1,82,000 units at Rs.7,37,500
(iii) Wages paid 3,40,600
(iv) Overheads paid 1,70,300
(v) Units scrapped 14,000
Degree of Completion: Material 100 %
(vi) Closing Work - in- Progress 18,000 units
(vii) Units completed and transferred to next process 1,58,000
(viii) Normal loss 5% of total input including opening WIP
(ix) Scrap value is Rs.5 per unit to be adjusted out of direct material cost
You are required to COMPUTE on the basis of FIFO
(i) Equivalent Production
(ii) Cost Per Unit
(iii) Value of Units transferred to next process.
(FIFO Method)
Particulars Units Particulars Units Material Labour & Overheads
(%) Units (%) Units
Opening WIP 8,000 Transfer to nextProcess:
Introduced 1,82,000 Opening WIP completed 8,000 — — 40 3,200
Introduced & completed 1,50,000 100 1,50,000 100 1,50,000
Normal loss 9,500 — — — —
5% (8,000 + 182,000)
Abnormal loss 4,500 100 4,500 80 3,600
Closing WIP 18,000 100 18,000 70 12,600
1,90,000 1,90,000 1,72,500 1,69,400
(ii) Computation of Cost per unit
Particulars Materials(Rs.) Labour(Rs.) Overhead(Rs.)
Input of Materials 7,37,500 — —
Expenses — 3,40,600 1,70,300
Total 7,37,500 3,40,600 1,70,300
Less : Sale of Scrap (9,500 units x Rs. 5) (47,500) — —
Net cost 6,90,000 3,40,600 1,70,300
Equivalent Units 1,72,500 1,69,400 1,69,400
Cost Per Unit 4.0000 2.0106 1.0053
Total cost per unit = Rs. (4.0000 + 2.0106 + 1.0053) = Rs. 7.0159

(iii) Value of units transferred to next process:

Amount (Rs.) Amount (Rs.)
Opening W-I-P 75,000
Add: Labour (3,200 units × Rs. 2.0106) 6,434
Overhead (3,200 units × Rs. 1.0053) 3,217 84,651
New introduced (1,50,000 units × Rs. 7.0159) 10,52,385
11,37,036
Q-16 Healthy Sweets’ is engaged in the manufacturing of jaggery. Its process involve sugarcane crushing for
juice extraction, then filtration and boiling of juice along with some chemicals and then letting it cool
to cut solidified jaggery blocks.
The main process of juice extraction (Process – I) is done in conventional crusher, which is then
filtered and boiled (Process – II) in iron pots. The solidified jaggery blocks are then cut, packed and
dispatched. For manufacturing 10 kg of jaggery, 100 kg of sugarcane is required, which extracts only 45
litre of juice.
Following information regarding Process – I has been obtained from the manufacturing department
of Healthy Sweets for the month of January, 2020:
(`)
Opening work-in process (4,500 litre)
Sugarcane 50,000
Labour 15,000
Overheads 45,000
Sugarcane introduced for juice extraction (1,00,000 kg) 5,00,000
Overheads 6,00,000
Abnormal Loss: 1,000 kg
Sugarcane 100%
Labour and overheads 80%
Closing work-in process: 9,000 litre
Sugarcane 100%
Labour and overheads 80%
Extracted juice transferred for filtering and boiling: 39,500 litre
(Consider mass of 1 litre of juice equivalent to 1 kg)
You are required to PREPARE using average method:
(i) Statement of equivalent production,
(ii) Statement of cost,
(iii) Statement of distribution cost, and
(iv) Process-I Account.

Ans.(i) Statement of Equivalent Production

Units Units Sugarcane Labour & O.H.
% Units % Units
Opening WIP 4,500 Completed and 39,500 100 39,500 100 39,500
transferred to
Process - II
Units introduced 1,00,000 Normal Loss 55,000 — — — —
(55%* of 1,00,000)
Abnormal loss 1,000 100 1,000 80 800
Closing WIP 9,000 100 9,000 80 7,200
1,04,500 1,04,500 49,500 47,500
* 100 kg of sugarcane extracts only 45 litre of juice. Thus, normal loss = 100 – 45 = 55%
(ii) Statement showing cost for each element
Particulars Sugarcane Labour Overhead Total
(`) (`) (`) (`)
Cost of opening work-in-process 50,000 15,000 45,000 1,10,000
Cost incurred during the month 5,00,000 2,00,000 6,00,000 13,00,000
Total cost: (A) 5,50,000 2,15,000 6,45,000 14,10,000
Equivalent units: (B) 49,500 47,500 47,500
Cost per equivalent unit: (C) = (A ÷ B) 11.111 4.526 13.579 29.216
(iii) Statement of Distribution of cost
Amount Amount
(`) (`)
1. Value of units completed and transferred 11,54,032
(39,500 units × ` 29.216)
2. Value of Abnormal Loss:
- Sugarcane (1,000 units × ` 11.111) 11,111
- Labour (800 units × ` 4.526) 3,621
- Overheads (800 units × ` 13.579) 10,863 25,595
- Sugarcane (9,000 units × ` 11.111) 99,999
- Labour (7,200 units × ` 4.526) 32,587
- Overheads (7,200 units × ` 13.579) 97,769 2,30,355

(iv) Process-I A/c

To Opening W.I.P: By Normal Loss 55,000 —
- Sugarcane 4,500 50,000 By Abnormal loss 1,000 25,613
(`25,595 + `18 (difference
due to approximation))
- Labour — 15,000 By Process-II A/c 39,500 11,54,032
- Overheads — 45,000 By Closing WIP 9,000 2,30,355
To Sugarcane introduced 100,000 5,00,000
To Direct Labour 2,00,000
To Overheads 6,00,000
104,500 14,10,000 104,500 14,10,000
Q-17 M Ltd. produces a product-X, which passes through three processes, I, II and III. In Process-III a by-
product arises, which after further processing at a cost of ‘85 per unit, product Z is produced. The
information related for the month of August 2020 is as follows:
Process-I Process-II Process-III
Normal loss 5% 10% 5%
Materials introduced (7,000 units) 1,40,000 - -
Other materials added 62,000 1,36,000 84,200
Direct wages 42,000 54,000 48,000
Direct expenses 14,000 16,000 14,000
Production overhead for the month is ` 2,88,000, which is absorbed as a percentage of direct wages.
The scrapes are sold at `10 per unit
Product-Z can be sold at `135 per unit with a selling cost of `15 per unit
No. of units produced:
Process-I- 6,600; Process-II- 5,200, Process-III- 4,800 and Product-Z- 600
There is not stock at the beginning and end of the month.
You are required to PREPARE accounts for:
(i) Process-I, II and III
(ii) By-product process.
Ans. (i) Process-I A/c
Particulars Units Amt.(`) Particulars Units Amt.(`)
To Materials 7,000 1,40,000 By Normal loss 350 3,500
(5% of 7,000)
To Other materials - 62,000 By Process-II* 6,600 3,35,955
To Direct wages - 42,000 By Abnormal loss* 50 2,545
To Direct expenses - 14,000
To Production OH - 84,000
(200% of ‘42,000) _____ _______ ____ _______
7,000 3,42,000 7,000 3,42,000

(3,42, 000 - 3, 500)

* =` 50,9022
(7,000 - 350)units
Process-II A/c
To Process-I A/c 6,600 3,35,955 By Normal loss 660 6,600
(10% of 6,600)
To Other -1,36,000 By Process-III** 5,200 5,63,206
materials
To Direct wages - 54,000 By Abnormal loss** 740 80,149
To Direct expenses - 16,000
To Production OH - 1,08,000
(200% of ‘54,000) _____ _______ ____ _______
6,600 6,49,955 6,600 6,49,955
(6,49,955 6,600)
* =`108,3089
(6,600 660)units
Process-III A/c
To Process-I A/c 5,200 5,63,206 By Normal loss 260 2,600
(5% of 5,200)
To Other materials - 84,200 By Product-X*** 4,800 8,64,670
To Direct wages - 48,000
To Direct expenses - 14,000 By Product-Z# 600 21,000
(`35×600)
To Production OH - 96,000
(200% of ‘48,000)
To Abnormal 460 82,864
gain***
5,660 8,88,270 5,660 8,88,270
***
 8,05, 406 - 2,600 - 21,000  =` 180.1396
(5,200 - 260 - 600) Units
# Realisable value = `135 – (85+15) = `35
(ii) By-Product Process A/c
To Process-III A/c 600 21,000 By Product-Z 600 81,000
To Processing cost - 51,000
To Selling expenses - 9,000
600 81,000 600 81,000

Q-18 Following information is available regarding process A for the month of October, 2021:
Production Record:
Units in process as on 01.10.2021 8,000
(All materials used, 25% complete for labour and overhead)
Units in process as on 31.10.2021 12,000
(All materials used, 33-1/3% complete for labour and overhead)
Cost Records:
Work-in-process as on 01.10.2021 (`)
Materials 12,00,000
Labour 2,00,000
Overhead 2,00,000
16,00,000
Cost during the month
Materials 51,20,000
Labour 30,00,000
Overhead 30,00,000
1,11,20,000
Presuming that average method of inventory is used, PREPARE:
(i) Statement of Equivalent Production.
(ii) Statement showing Cost for each element.
(iii) Statement of Apportionment of cost.
(iv) Process Cost Account for Process A.
Ans.(i) Statement of Equivalent Production (Average cost method)
Input Particulars Output Equivalent Production
(Units) Units
Materials Labour Overheads
(%*) Units** (% )* Units** (%)* Units**
40,000 Completed 28,000 100 28,000 100 28,000 100 28,000
WIP 12,000 100 12,000 33-1/3 4,000 33-1/3 4,000
40,000 40,000 40,000 32,000 32,000
*Percentage of completion ** Equivalent units
(ii) Statement showing Cost for each element
Cost of opening work-in-progress (`) 12,00,000 2,00,000 2,00,000 16,00,000
Cost incurred during the month (`) 51,20,000 30,00,000 30,00,000 1,11,20,000
Total cost (`) : (a) 63,20,000 32,00,000 32,00,000 1,27,20,000
Equivalent units : (B) 40,000 32,000 32,000
Cost per equivalent unit (`) : C= (A ÷B) 158 100 100 358

(iii) Statement of Apportionment of cost

(`) (`)
Value of output transferred: (A) (28,000 units × ` 358) 1,00,24,000
Value of closing work-in-progress: (B)
Material (12,000 units × ` 158) 18,96,000
Labour (4,000 units × ` 100) 4,00,000
Overhead (4,000 units × ` 100) 4,00,000 26,96,000
Total cost : (A + B) 1,27,20,000
(iv) Process- A Account
To Opening WIP 8,000 16,00,000 By Completed units 28,000 1,00,24,000
To Materials 32,000 51,20,000 By Closing WIP 12,000 26,96,000
To Labour 30,00,000
To Overhead _____ 30,00,000 ______ _________
40,000 1,27,20,000 40,000 1,27,20,000
Q-19 Navyug Ltd. manufactures chemical solutions for the food processing industry. The manufacturing
takes place in a number of processes and the company uses a FIFO process costing system to value
work-in-process and finished goods. At the end of the last month, a fi re occurred in the factory and
destroyed some of the paper files containing records of the process operations for the month.
Navyug Ltd. needs your help to prepare the process accounts for the month during which the fire
occurred. You have been able to gather some information about the month’s operating activities but
some of the information could not be retrieved due to the damage. The following information was
salvaged:
• Opening work-in-process at the beginning of the month was 900 litres, 70% complete for labour
and 60% complete for overheads. Opening work-in-process was valued at ` 29,970.
• Normal loss is 10% of input and total losses during the month were 1,800 litres partly due to the
fire damage.
• Losses have a scrap value of ` 20 per litre.
• The cost per equivalent unit (litre) is ` 39 for the month made up as follows:
(`)
Raw Material 23
Labour 7
Overheads 9
39
REQUIRED:
(i) Calculate the quantity (in litres) of raw material inputs during the month.
(ii) Calculate the quantity (in litres) of normal loss expected from the process and the quantity (in

(iii) Calculate the values of raw material, labour and overheads added to the process during the month.
(iv) Prepare the process account for the month.
Ans. (i) Calculation of Raw Material inputs during the month:
Quantities Entering Process Litres Quantities Leaving Process Litres
Opening WIP 900 Transfer to Finished Goods 4,200
Raw material input (balancing figure) 5,260 Process Losses 1,800
Closing WIP 160
6,160 6,160
Particulars Litres
Abnormal Loss (balancing figure) 1,274
Cost per equivalent unit ` 23.00 ` 7.00 ` 9.00
Equivalent units (litre) (refer the
working note) 4,734 4,892 4,966
Cost of equivalent units ` 1,08,882 ` 34,244 ` 44,694
Add: Scrap value of normal loss (526
units x ` 20) ` 10,520 -- --
Total value added ` 1,19,402 ` 34,244 ` 44,694
Workings:
Input Units Output details Units Equivalent Production
Details Material Labour Overheads
Units (%) Units (%) Units (%)
Opening WIP 900 Units completed:
Units introduced 5,260 - Opening WIP 900 -- -- 270 30 360 40
- Fresh inputs 3,300 3,300 100 3,300 100 3,300 100
Normal loss 526 - - -- -- -- -- --
Abnormal loss 1,274 1,274 100 1,274 100 1,274 100
Closing WIP 160 160 100 48 30 32 20
6,160 6,160 4,734 4,892 4,966
(iv) Process Account for Month
Litres Amount (`) Litres Amount (`)
To Opening WIP 900 29,970 By Finished goods 4,200 1,63,800
To Raw Materials 5,260 1,19,402 By Normal loss 526 10,520
To Wages -- 34,244 By Abnormal loss 1,274 49,686
To Overheads -- 44,694 By Closing WIP 160 4,304
6,160 2,28,310 6,160 2,28,310

Q-20 A Manufacturing unit manufactures a product ‘XYZ’ which passes through three distinct Processes - X,
Y and Z. The following data is given:
Process X Process Y Process Z
Material consumed (in `) 2,600 2,250 2,000
Direct wages (in `) 4,000 3,500 3,000
• The total Production Overhead of ` 15,750 was recovered @ 150% of Direct wages.
• 15,000 units at ` 2 each were introduced to Process ‘X’.
• The output of each process passes to the next process and finally, 12,000 units were transferred to
Finished Stock Account from Process ‘Z’.
• No stock of materials or work in progress was left at the end.
The following additional information is given:
Process % of wastage to normal input Value of Scrap per unit (`)
X 6% 1.10
Y ? 2.00
Z 5% 1.00
(i) Find out the percentage of wastage in process ‘Y’, given that the output of Process ‘Y’ is transferred
to Process ‘Z’ at ` 4 per unit.
(ii) Prepare Process accounts for all the three processes X, Y and Z.
Ans. Dr. Process-X Account Cr.
To Material 15,000 30,000 By Normal Loss A/c 900 990
introduced [(6% of 15,000 units)
x ` 1.1]
” Additional — 2,600 ” Process-Y A/c 14,100 41,610
material (` 2.951* × 14,100
units)
” Direct wages — 4,000
” Production OH — 6,000 ______ ______
15,000 42,600 15,000 42,600
*Cost per unit of completed units
Dr. Process-Y Account Cr.

To Process-X A/c 14,100 41,610 By Normal Loss A/c
[(#13.44% of
14,100 units) x ` 2] 1,895 3,790
” Additional
material — 2,250 ” Process-Z A/c
(` 4 × 12,205 units) 12,205 48,820
” Production OH — 5,250
14,100 52,610 14,100 52,610
#Calculation for % of wastage in process ‘Y’:

Let’s consider number of units lost under process ‘Y’ = A

Now, Total Cost - Realisable value from normal loss =4
Inputs units - Normal loss units
` 52,610 - ` 2A =`4
14,100 units - A
` 52,610 - ` 2A = ‘ 56,400 - ` 4A
2A = ` 3,790 = > A = 1,895 units
% of wastage = 1,895 units / 14,100 units = 13.44%
Dr. Process-Z Account Cr.
To Process-Y A/c 12,205 48,820 By Normal Loss A/c 610 610
[(5% of 12,205
units) x ` 1]
” Additional material — 2,000 ” Finished Stock A/c
(` 4.9771$ ×
12,000 units) 12,000 59,726
” Abnormal gain
(` 4.9771$ × 405 units) 405 2,016 ______ ______
12,610 60,336 12,610 60,336
$Cost per unit of completed units
Dr. Process-X Account Cr.
To Material 15,000 30,000 By Normal Loss A/c 900 990
introduced [(6% of 15,000 units) x
` 1.1]
” Additional — 2,600 ” Process-Y A/c 14,100 41,610
material (` 2.951* × 14,100 units)
15,000 42,600 15,000 42,600

Dr. Process-Y Account Cr.

To Process-X A/c 14,100 41,610 By Normal Loss A/c 1,895 3,790
[(#13.44% of 14,100
units) x ‘ 2]
” Additional material — 2,250 ” Process-Z A/c 12,631 50,524
(‘ 4 × 12,631@ units)
” Abnormal gain 426 1,704
(` 4 × 426 units) _____ ______ ______ ______
14,526 54,314 14,526 54,314
Working Notes:
@1. Units Transferred from Process Z Account to Finished Stock = 12,000 Units i.e 95% of Inputs.
So, Input of Z or Output of Y is 12,000 x 100/95 = 12,631 Units and Normal Loss (5%) is 631 units.
2. Let’s consider number of units lost under process ‘Y’ as:
For Normal loss = A
For Abnormal loss = B
Now, A + B = 1,469 [i.e. 14,100 – 12,631] …(I)
(A x ` 2 per unit) + (B x ‘ 4 per unit) = [ 52,610 – 50,524]
2A + 4B = 2,086 …(II)
Now, putting the values of (I) in (II), we get,
2(1,469 – B) + 4B = 2,086
2938 – 2B + 4B = 2,086
2B = - 852 => B = - 426 units
Since, the figure of B is in negative, it is an abnormal gain of 426 units.
Further, A (i.e. normal loss) = 1,469 + 426 = 1,895 units
#3. % of wastage in Process Y Account = 1,895 units / 14,100 units = 13.44%
Dr. Process-Z Account Cr.
To Process-Y A/c 12,631 50,524 By Normal Loss A/c
[(5% of 12,631 units) x ` 1] 631 631
” Additional material — 2,000
” Production OH — 4,500 ” Finished Stock A/c 12,000 59,393
(` 4.9494$ × 12,000
______ ______ units) ______ ______
12,631 60,024 12,631 60,024

Q-21 MRSL Healthcare Ltd. has incurred the following expenditure during the last year for its newly launched
‘COVID-19’ Insurance policy:
Office administration cost 48,00,000
Claim management cost 3,80,000
Employees cost 16,20,000
Postage and logistics 32,40,000
Policy issuance cost 29,50,000
Facilities cost 46,75,000
Cost of marketing of the policy 1,38,90,000
Policy development cost 35,00,000
Policy servicing cost 96,45,000
Sales support expenses 32,00,000
I.T. Cost ?
Number of Policy sold: 2,800
Total insured value of policies - ` 3,500 Crores
Cost per rupee of insured value - ` 0.002
(i) Calculate Total Cost for “COVID-19” Insurance policy segregating the costs into four main activities
namely (a) Marketing and Sales suppor t (b) Operations (c) I.T. Cost and (d) Support functions.
(ii) Calculate Cost Per Policy
Ans. (i)Calculation of total cost for ‘COVID-19’ Insurance policy
a. Marketing and Sales support:
- Policy development cost 35,00,000
- Cost of marketing 1,38,90,000
- Sales support expenses 32,00,000 2,05,90,000
b. Operations:
- Policy issuance cost 29,50,000
- Policy servicing cost 96,45,000
- Claim management cost 3,80,000 1,29,75,000
c. IT Cost* 2,21,00,000
d. Support functions
- Postage and logistics 32,40,000
- Facilities cost 46,75,000
- Employees cost 16,20,000
- Office administration cost 48,00,000 1,43,35,000
*IT cost
= (` 3,500 crores x 0.002) – ` 4,79,00,000 = ` 2,21,00,000
(ii) Calculation of cost per policy = Total cost / No.of policies = ` 7,00,00,000 / 2,800 = ` 25,000

Q-22 MNO Ltd has provided following details:

 Opening work in progress is 10,000 units at ‘ 50,000 (Material 100%, Labour and overheads 70%
complete).
 Input of materials is 55,000 units at ` 2,20,000. Amount spent on Labour and Overheads is ` 26,500
and ` 61,500 respectively.
 9,500 units were scrapped; degree of completion for material 100% and for labour & overheads
60%.
 Closing work in progress is 12,000 units; degree of completion for material 100% and for labour &
overheads 90%.
 Finished units transferred to next process are 43,500 units.
Normal loss is 5% of total input including opening work in progress. Scrapped units would fetch `
8.50 per unit.
You are required to prepare using FIFO method:
(i) Statement of Equivalent production
(ii) Abnormal Loss Account
Ans. (i) Statement of Equivalent Production (Using FIFO method)
Units Units Material Labour &
O.H.
% Units % Units
Opening WIP 10,000 Completed and
transferred to
Process-II
Units introduced 55,000 - From opening 10,000 - 30 3,000
WIP
- From fresh inputs 33,500 100 33,500 100 33,500
43,500 33,500 36,500
Normal Loss 3,250 - -
{5% (10,000 +
55,000 units)}
Abnormal loss
(9,500 – 3,250) 6,250 100 6,250 60 3,750
_____ Closing WIP 12,000 100 12,000 90 10,800
65,000 65,000 51,750 51,050
(ii) Abnormal Loss A/c
To Process-I A/c 6,250 29,698 By Cost Ledger Control A/c 6,250 53,125
(Refer Working (6,250 units × ` 8.5)
Note-2)
To Costing Profit - 23,427
& Loss A/c _____ ______ _____ ______
6,250 53,125 6,250 53,125

Working Notes:
1. Computation of Cost per unit
Particulars Materials Labour Overhead
(`) (`) (`)
Input costs 2,20,000 26,500 61,500
Less: Realisable value of normal (27,625) — —
scrap (3,250 units x ` 8.5)
Net cost 1,92,375 26,500 61,500
Equivalent Units 51,750 51,050 51,050
Cost Per Unit 3.7174 0.5191 1.2047
Total cost per unit = ` (3.7174 + 0.5191 + 1.2047) = ` 5.4412
2. Valuation of Abnormal Loss
(`)
Materials (6,250 units × ` 3.7174) 23,233.75
Labour (3,750 units × ` 0.5191) 1,946.63
Overheads (3,750 units × ` 1.2047) 4,517.62
29,698
Q-23 ABC Health care runs an Intensive Medical Care Unit. For this purpose, it has hired a building at a rent of
`50,000 per month with the agreement to bear the repairs and maintenance charges also.
The unit consists of 100 beds and 5 more beds can comfortably be accommodated when the situation
demands. Though the unit is open for patients all the 365 days in a year, scrutiny of accounts for the
year 2020 reveals that only for 120 days in the year, the unit had the full capacity of 100 patients per day
and for another 80 days, it had, on an average only 40 beds occupied per day. But, there were occasions
when the beds were full, extra beds were hired at a charge of ‘ 50 per bed per day. This did not come to
more than 5 beds above the normal capacity on any one day. The total hire charges for the extra beds
incurred for the whole year amounted to ` 20,000.
The unit engaged expert doctors from outside to attend on the patients and the fees were paid on the
basis of the number of patients attended and time spent by them which on an average worked out to
` 30,000 per month in the year 2020.
The permanent staff expenses and other expenses of the unit were as follows:
`
2 Supervisors each at a per month salary of 5,000
4 Nurses each at a per month salary of 3,000
2 Ward boys each at a per month salary of 1,500
Other Expenses for the year were as under:
Repairs and Maintenance 28,000
Food supplied to patients 4,40,000
Caretaker and Other services for patients 1,25,000
Laundry charges for bed linen 1,40,000
Medicines supplied 2,80,000
Cost of Oxygen etc. other than directly borne for treatment of patients 75,000
General Administration Charges allocated to the unit 71,000

Required:
(i) What is the profit per patient day made by the unit in the year 2020, if the unit recovered an overall
amount of ` 200 per day on an average from each patient.
(ii) The unit wants to work on a budget for the year 2021, but the number of patients requiring medical care
is a very uncertain factor. Assuming that same revenue and expenses prevail in the year 2021 in the first
instance, work out the number of patient days required by the unit to break even.
Ans. Workings:
Calculation of number of Patient days
100 Beds × 120 days = 12000
40 Beds × 80 days = 3,200
Extra beds = 400
Total = 15,600
(i) Statement of Profitability
Income for the year (` 200 per patient per day ×
15,600 patient days) 31,20,000
Variable Costs:
Doctor Fees (` 30,000 per month × 12) 3,60,000
Food to Patients (Variable) 4,40,000
Caretaker Other services to patients (Variable) 1,25,000
Laundry charges (Variable) 1,40,000
Medicines (Variable) 2,80,000
Bed Hire Charges (` 50 × 400 Beds) 20,000
Total Variable costs (13,65,000)
Contribution 17,55,000
Fixed Costs:
Rent (` 50,000 per month × 12) 6,00,000
Supervisor (2 persons × ` 5,000 × 12) 1,20,000
Nurses (4 persons × ` 3,000 × 12) 1,44,000
Ward Boys (2 persons x ` 1500 x12) 36,000
Repairs (Fixed) 28,000
Cost of Oxygen 75,000
Administration expenses allocated 71,000
Total Fixed Costs (10,74,000)
Profit 6,81,000
Calculation of Contribution and profit per Patient day
Total Contribution = ` 17,55,000
Total Patient days = 15,600 days
Contribution per Patient day = ` 17,55,000 / 15,600 days = ` 112.50
Total Profit = ` 6,81,000
Total Patient days = 15,600 days
Profit per Patient day = ` 6,81,000 / 15,600 days = ` 43.65

(ii) Breakeven Point = Fixed Cost / Contribution per Patient day

= ` 10,74,000 / ` 112.50
= 9,547 patient days
Q-24 Following details are related to the work done in Process-I by ABC Ltd. during the month of May 2019 :
Opening work in process (3,000 units) (` )
Materials 1,80,500
Labour 32,400
Overheads 90,000
Materials introduced in Process-I (42,000 units) 36,04,000
Labour 4,50,000
Overheads 15,18,000
Units Scrapped : 4,800 units
Degree of completion :
Materials : 100%
Labour & overhead : 70%
Closing Work-in-process : 4,200 units
Degree of completion :
Materials : 100%
Labour & overhead : 50%
Units finished and transferred to Process-II : 36,000 units
Normal loss:
4% of total input including opening work-in-process
Scrapped units fetch ` 62.50 per piece.
Prepare:
(i) Statement of equivalent production. (ii) Statement of cost per equivalent unit.
(iii) Process-I A/c (iv) Normal Loss Account and
(v) Abnormal Loss Account
Ans. (i) Statement of Equivalent Production (Weighted Average method)
O.H.
% Units % Units
transferred to
Process-II
Units introduced 42,000 Normal Loss 1,800 — — — —
(4% of 45,000 units)
Abnormal loss 3,000 100 3,000 70 2,100
(Balancing figure)
Closing WIP 4,200 100 4,200 50 2,100
45,000 45,000 43,200 40,200


Particulars Materials (`) Labour (`) Overhead (`) Total (`)
Cost of opening workin-
process 1,80,500 32,400 90,000 3,02,900
Cost incurred during
the month 36,04,000 4,50,000 15,18,000 55,72,000
Less: Realisable (1,12,500) — — (1,12,500)
Value of normal scrap
(` 62.50 × 1,800 units)
Total cost: (A) 36,72,000 4,82,400 16,08,000 57,62,400
Cost per equivalent 85.00 12.00 40.00 137.00
unit: (C) = (A ÷ B)
Statement of Distribution of cost
1. Value of units completed and transferred: 49,32,000
(36,000 units × ` 137)
2. Value of Abnormal Loss:
- Materials (3,000 units × ` 85) 2,55,000
- Labour (2,100 units × ` 12) 25,200
- Overheads (2,100 units × ` 40) 84,000 3,64,200
- Materials (4,200 units × ` 85) 3,57,000
- Labour (2,100 units × ` 12) 25,200
- Overheads (2,100 units × ` 40) 84,000 4,66,200
(iii) Process-I A/c
To Opening W.I.P:
- Materials 3,000 1,80,500 By Normal Loss 1,800 1,12,500
- Labour — 32,400 (` 62.5 × 1,800 units)
- Overheads — 90,000
To Materials introduced 42,000 36,04,000 By Abnormal loss 3,000 3,64,200
To Labour 4,50,000 By Process-I A/c 36,000 49,32,000
To Overheads 15,18,000 By Closing WIP 4,200 4,66,200
45,000 58,74,900 45,000 58,74,900
(iv) Normal Loss A/c
Particulars Units (` ) Particulars Units (`)
To Process-I A/c 1,800 1,12,500 By Cost Ledger 1,800 1,12,500
Control A/c
1,800 1,12,500 1,800 1,12,500

(v) Abnormal Loss A/c

To Process-I A/c 3,000 3,64,200 By Cost Ledger Control 3,000 1,87,500
A/c (‘ 62.5 × 3,000
units)
By Costing Profit &
Loss A/c (Bal. Figure) 1,76,700
3,000 3,64,200 3,000 3,64,200
Q-25 SEZ Ltd. built a 120 km. long highway and now operates a toll road to collect tolls. The company has
invested ` 900 crore to build the road and has estimated that a total of 120 crore vehicles will be using
the highway during the 10 years toll collection tenure. The other costs for the month of “June 2020” are
as follows:
(i) Salary:
• Collection personnel (3 shifts and 5 persons per shift) - ` 200 per day per person.
• Supervisor (3 shifts and 2 persons per shift) - ` 350 per day per person.
• Security personnel (2 shifts and 2 persons per shift) - ` 200 per day per person.
• Toll Booth Manager (3 shifts and 1 person per shift) - ` 500 per day per person.
(ii) Electricity - ` 1,50,000
(iii) Telephone - ` 1,00,000
(iv) Maintenance cost - ` 50 lakhs
(v) The company needs 30% profit over total cost.
Required:
(1) Calculate cost per kilometre.
(2) Calculate the toll rate per vehicle.
Ans. Statement of Cost
Particulars (` )
 `900 crore 1 
A. Apportionment of capital cost  10 years  12 months  7,50,00,000
 
B. Other Costs
Salary to Collection Personnel (3 Shifts × 5 persons per shift × 30 days × ` 200 per day) 90,000
Salary to Supervisor (3 Shifts × 2 persons per shift × 30 days × ` 350 per day) 63,000
Salary to Security Personnel (2 Shifts × 2 persons per shift × 30 days × ` 200 per day) 24,000
Salary to Toll Booth Manager (3 Shifts × 1 person per shift × 30 days × ` 500 per day) 45,000
Electricity 1,50,000
Telephone 1,00,000
4,72,000
C. Maintenance cost 50,00,000
Total (A + B + C) 8,04,72,000

(1) Calculation of cost per kilometre:
(2) Calculation of toll rate per vehicle:
Working:
Vehicles per month =
Q-26 Following information is available regarding Process-I of a manufacturing company for themonth of
February:
Production Record:
Units in process as on 1st February
(All materials used, 1/4th complete for labour and overhead) 8,000
Units in process as on 28th February 12,000
(All materials used, 1/3rd complete for labour and overhead)
Cost Records: (` )
Work-in-process as on 1st February
Materials 1,20,000
Labour 20,000
Overhead 20,000
1,60,000
Cost during the month:
Materials 5,12,000
Labour 3,00,000
Overhead 3,00,000
11,12,000
Presuming that average method of inventory is used, PREPARE the following:
(i) Statement of equivalent production.
(ii) Statement showing cost for each element.
(iii) Statement of apportionment of cost.
(iv) Process cost account for Process-I.

Ans.(i) Statement of equivalent production (Average cost method)

O.H.
% Units % Units
transferred
Units introduced 32,000 Closing WIP 12,000 100 12,000 1/3rd 4,000
40,000 40,000 40,000 32,000
(` ) (` ) (` ) (` )
Cost of opening work-inprocess 1,20,000 20,000 20,000 1,60,000
Cost incurred during the month 5,12,000 3,00,000 3,00,000 11,12,000
Total cost: (A) 6,32,000 3,20,000 3,20,000 12,72,000
Cost per equivalent unit: (C) = (A ÷ B) 15.8 10 10 35.8
(iii) Statement of apportionment of cost
1. Value of units completed and transferred 10,02,400
(28,000 units × ` 35.8)
- Materials (12,000 units × ` 15.8) 1,89,600
- Labour (4,000 units × ` 10) 40,000
- Overheads (4,000 units × ` 10) 40,000 2,69,600
(iv) Process-I Cost Account
To Opening W-I-P 8,000 1,60,000 By Completed units 28,000 10,02,400
To Materials 32,000 5,12,000 By Closing W-I-P 12,000 2,69,600
To Labour — 3,00,000
To Overhead — 3,00,000
40,000 12,72,000 40,000 12,72,000
Q-27 A company produces a component, which passes through two processes. During the month of November,
2020, materials for 40,000 components were put into Process- I of which 30,000 were completed and
transferred to Process- II. Those not transferred to Process- II were 100% complete as to materials cost
and 50% complete as to labour and overheads cost. The Process- I costs incurred were as follows:
Direct Materials ` 3,00,000
Direct Wages ` 3,50,000
Factory Overheads `2,45,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished goods
stores. There was a normal loss with no salvage value of 200 units in Process II.
There were 1,800 units, remained unfinished in the process with 100% complete as to materials and
25% complete as regard to wages and overheads.

Costs incurred in Process-II are as follows:

Packing Materials ` 80,000
Direct Wages ` 71,125
Factory Overheads ` 85,350
Packing material cost is incurred at the end of the second process as protective packing to the completed
units of production.
Required:
(i) PREPARE Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) PREPARE statement of Equivalent Production, Cost per unit and Process II A/c.
Ans. Process I
Statement of Equivalent Production and Cost
(Units) Units Materials Labour Overheads
40,000 Completed 30,000 100 30,000 100 30,000 100 30,000
Closing WIP 10,000 100 10,000 50 5,000 50 5,000
40,000 40,000 40,000 35,000 35,000
Cost incurred (‘) 3,00,000 3,50,000 2,45,000 8,95,000
Equivalent units 40,000 35,000 35,000
Cost per equivalent unit (‘) 7.50 10.00 7.00 24.50
Process-I Account
To Materials 40,000 3,00,000 By Process-II A/c 30,000 7,35,000
(30,000 units × ‘24.5)
To Labour 3,50,000 By Closing WIP* 10,000 1,60,000
To Overhead _____ 2,45,000 ______ _______
40,000 8,95,000 40,000 8,95,000
* (Material 10,000 units × ` 7.5) + (Labour 5,000 units × ` 10) + (Overheads 5,000 units × `7)
= ` 75,000 + ` 50,000 + ` 35,000 = ` 1,60,000
Process II
(Units) Units Materials Labour Overheads
30,000 Completed 28,000 100 28,000 100 28,000 100 28,000
Normal loss 200 — — —
Closing WIP 1,800 100 1,800 25 450 25 450
30,000 30,000 29,800 28,450 28,450


Process-I Cost 7,35,000 — — 7,35,000
Cost incurred (`) — 71,125 85,350 1,56,475
Equivalent units 29,800 28,450 28,450 —
Cost per equivalent unit (`) 24.6644 2.5000 3.0000 30.1644
Process-II Account
To Process-I A/c 30,000 7,35,000 By Normal loss A/c 200 —
To Packing Material — 80,000 By Finished Goods 28,000* 9,24,604
Stock A/c
To Direct Wages — 71,125 By Closing WIP 1,800** 46,871
To Factory Overhead — 85,350 ______ _______
30,000 9,71,475 30,000 9,71,475
* 28,000 × ` 30.1644 = ` 8,44,603 + ` 80,000 (Packing Material Cost) = ` 9,24,604

** 1,800 units × ` 24.6644 + 450 units × (` 2.5 + ` 3) = ` 46,871.
Q-28 A company produces a component, which passes through two processes. During the month of December,
2021, materials for 40,000 components were put into Process-I of which 30,000 were completed and
transferred to Process-II. Those not transferred to Process- II were 100% complete as to materials cost
and 50% complete as to labour and overheads cost. The Process- I costs incurred were as follows:
Direct Materials ` 6,00,000
Factory Overheads ` 4,90,000
Of those transferred to Process II, 28,000 units were completed and transferred to finished goods
stores. There was a normal loss with no salvage value of 200 units in Process II. There were 1,800 units,
remained unfinished in the process with 100% complete as to materials and 25% complete as regard to
wages and overheads.
Costs incurred in Process-II are as follows:
Packing Materials ` 1,60,000
Factory Overheads ` 1,70,700
Packing material cost is incurred at the end of the second process as protective packing to the completed
units of production.
Required:
(i) PREPARE Statement of Equivalent Production, Cost per unit and Process I A/c.
(ii) PREPARE statement of Equivalent Production, Cost per unit and Process II A/c.

Ans.
(i) Process I
Units (Units) Materials Labour Overheads
40,000 Completed 30,000 100 30,000 100 30,000 100 30,000
Closing WIP 10,000 100 10,000 50 5,000 50 5,000
40,000 40,000 40,000 35,000 35,000
Cost incurred (`) 6,00,000 7,00,000 4,90,000 17,90,000
Equivalent units 40,000 35,000 35,000
Cost per equivalent unit (`) 15 20 14 49
Process-I Account
To Materials 40,000 6,00,000 By Process-II A/c 30,000 14,70,000
(30,000 units × ‘49)
To Labour 7,00,000 By Closing WIP* 10,000 3,20,000
To Overhead 4,90,000
40,000 17,90,000 40,000 17,90,000
* (Material 10,000 units × ` 15) + (Labour 5,000 units × ` 20) + (Overheads 5,000 units × ` 14)
= ` 1,50,000 + ` 1,00,000 + ` 70,000 = ` 3,20,000
(ii) Process II
Units (Units) Materials Labour Overheads
30,000 Completed 28,000 100 28,000 100 28,000 100 28,000
Normal loss 200 — — —
Closing WIP 1,800 100 1,800 25 450 25 450
30,000 30,000 29,800 28,450 28,450
Process-I Cost 14,70,000 — — 14,70,000
Cost incurred (`) — 1,42,250 1,70,700 3,12,950
Equivalent units 29,800 28,450 28,450 —
Cost per equivalent unit (`) 49.3289 5.00 6.00 60.3289
Process-II Account
To Process-I A/c 30,000 14,70,000 By Normal loss A/c 200 —
To Packing Material — 1,60,000 By Finished Goods
Stock A/c 28,000* 18,49,209
To Direct Wages — 1,42,250 By Closing WIP 1,800** 93,741
To Factory Overhead — 1,70,700 ______ ______
30,000 19,42,950 30,000 19,42,950
* 28,000 × ‘ 60.3289 = ` 16,89,209 + ` 1,60,000 (Packing Material Cost) = ` 18,49,209
** 1,800 units × ` 49.3289 + 450 units × (` 5 + `6) = ` 93,741

Q-29 A product passes through Process-I and Process-II.

Particulars pertaining to the Process-I are:
Materials issued to Process-I amounted to ` 80,000, Wages ` 60,000 and manufacturing overheads
were ` 52,500. Normal Loss anticipated was 5% of input, 9,650 units of output were produced and
transferred out from Process-I to Process-II. Input raw materials issued to Process-I were 10,000 units.
There were no opening stocks.
Scrap has realizable value of ` 5 per unit.
(i) Process-I Account
(ii) Abnormal Gain/Loss Account
Ans.
(i) Process - I Account
To Materials 10,000 80,000 By Normal loss 500 2,500
(5% of 10,000)
To Wages - 60,000 By Process-II A/c 9,650 1,93,000
(`20*×9,650units)
To Manufacturing OH 52,500
To Abnormal Gain A/c 150 3,000
(`20*×150units) 10,150 1,95,500 10,150 1,95,500
(ii) Abnormal Gain - Account

Particulars Units (` ) Particulars Units (` )
To Normal loss A/c 150 750 By Process-I A/c 150 3,000
To Costing P&L A/c - 2,250
150 3,000 150 3,000
Q-30 A Manufacturing unit manufactures a product which passes through three distinct Processes - A, B and
C. The following data is given:
Process A Process B Process C
Material consumed (in `) 36,400 31,500 28,000
Direct wages (in `) 56,000 49,000 42,000
• The total Production Overhead of ` 2,20,500 was recovered @ 150% of Direct wages.
• 15,000 units at ` 28 each were introduced to Process ‘A’.
• The output of each process passes to the next process and finally, 12,000 units were transferred to
Finished Stock Account from Process ‘C’.
• No stock of materials or work in progress was left at the end.
The following additional information is given:
Process % of wastage to normal input Value of Scrap per unit (`)
A 6% 15.40
B ? 28.00
C 5% 14.00


(i) FIND OUT the percentage of wastage in process ‘B’, given that the output of Process ‘B’ is transferred
to Process ‘C’ at ` 56 per unit.
(ii) PREPARE Process accounts for all the three processes A, B and C.
Ans.
Dr. Process-A Account Cr.
To Material introduced 15,000 4,20,000 By Normal Loss A/c
[(6% of 15,000 units) x ` 15.40] 900 13,860
” Additional material — 36,400 ” Process-B A/c
(` 41.31* × 14,100 units) 14,100 5,82,540
” Production OH — 84,000 ______ _______
15,000 5,96,400 15,000 5,96,400
Dr. Process-B Account Cr.

To Process-A A/c 14,100 5,82,540 By Normal Loss A/c
[(#13.44% of 14,100
units) x ` 28] 1,895 53,060
” Additional material — 31,500 ” Process-C A/c
(` 56 × 12,205 units) 12,205 6,83,480
” Production OH — 73,500 _____ _______
14,100 7,36,540 14,100 7,36,540
#Calculation for % of wastage in process ‘B’:
Let’s consider number of units lost under process ‘B’ = b
` 7,36,540 - ` 28b = ` 7,89,600 - ` 56b

28b = ` 53,060 => b = 1,895 units
% of wastage = = 13.44%

Dr. Process-C Account Cr.

To Process-B A/c 12,205 6,83,480 By Normal Loss A/c
[(5% of 12,205 units) x ` 14] 610 8,540
” Additional material — 28,000 ” Finished Stock A/c
(` 69.68$ × 12,000 units) 12,000 8,36,160
” Abnormal gain
(` 69.68$ × 405 units) 405 28,220 ______ ________
12,610 8,44,700 12,610 8,44,700
Q-31 Chill Ltd. uses process costing to manufacture water density sensor for hydro sector. The following
information pertains to operations for the month of February:
Particulars Units
Beginning WIP, February 1 22,400
Started in production during February 1,40,000
Completed production during February 1,28,800
Ending work in progress, February 28 33,600
The beginning work in progress was 50% complete for materials and 30% complete for conversion
costs. The ending inventory was 80% complete for material and 30% complete for conversion costs.
Costs pertaining to the month of February are as follows:
Beginning inventory costs are material ` 1,38,350, direct labour ` 1,50,600 and factory overhead `63,600
Cost incurred during February are material ` 23,95,000, direct labour ` 9,14,400, factory overheads
`19,55,800.
CALCULATE:
(i) Using the FIFO method, the equivalent units of production for material.
(ii) Cost per equivalent unit for conversion cost.
Ans.
(i) Calculation of equivalent units of production:
Input Details Units Output Particulars Units Equivalent Units
Material Conversion cost
% Units % Units
Beginning WIP 22,400 From beginning WIP 22,400 50 11,200 70 15,680
Unit Introduced 1,40,000 Completed output 1,06,400 100 1,06,400 100 1,06,400
Closing W-I-P 33,600 80 26,880 30 10,080
Total 1,62,400 Total 1,62,400 1,44,480 1,32,160

(ii) Calculation of cost per equivalent unit for conversion costs

Particulars
Direct labour ` 9,14,400
Factory overheads ` 19,55,800
Total ` 28,70,200
Equivalent units 1,32,160 units
Cost per equivalent unit ` 21.72
Q-32 Paras Travels provides mini buses to an IT company for carrying its employees from home to office and
dropping back after office hours. It runs a fleet of 8 mini buses for this purpose. The buses are parked
in a garage adjoining the company’s premises. Company is operating in two shifts (one shift in the
morning and one shift in the afternoon). The distance travelled by each mini bus one way is 30 kms. The
company works for 20 days in a month.
The seating capacity of each mini bus is 30 persons. The seating capacity is normally 80% occupied
during the year. The details of expenses incurred for a year are as under:
Particulars
Driver’s salary ` 20,000 per driver per month
Lady attendant’s salary (mandatorily required for
each mini bus) ` 10,000 per attendant per month
Cleaner’s salary (One cleaner for 2 mini buses) ` 15,000 per cleaner per month
Diesel (Avg. 8 kms per litre) ` 80 per litre
Insurance charges (per annum) 2% of Purchase Price
License fees and taxes ` 5,080 per mini bus per month
Garage rent paid ` 24,000 per month
Repair & maintenance including engine oil and
lubricants (for every 5,760 kms) ` 2,856 per mini bus
Purchase Price of mini bus ` 15,00,000 each
Residual life of mini bus 8 Years
Scrap value per mini bus at the end of residual life ` 3,00,000
Paras Travels charges two types of fare from the employees. Employees coming from a distance of
beyond 15 kms away from the office are charged double the fare which is charged from employees
coming from a distance of up-to 15 kms. away from the office. 50% of employees travelling in each trip
are coming from a distance beyond 15 kms. from the office. The charges are to be based on average
cost.
(i) Prepare a statement showing expenses of operating a single mini bus for a year,
(ii) Calculate the average cost per employee per month in respect of:
(a) Employees coming from a distance upto 15 kms. from the office.
(b) Employees coming from a distance beyond 15 kms. from the office. (10 Marks)

Ans.
(i) Statement of Expenses of operating a mini bus in a year
Particulars Rate (`) Per Bus per
annum (`)
(A) Standing Charges:
Driver’s salary 20,000 p.m 2,40,000
Lady attendant’s salary 10,000 p.m 1,20,000
Average Cleaner’s salary (50%) 15,000 p.m 90,000
Insurance charge 30,000 p.a. 30,000
License fee, taxes etc. 5,080 p.m. 60,960
Average Garage Rent 24,000 p.m 36,000
Depreciation {(15,00,000 – 3,00,000) ÷ 8} 1,50,000 p.a. 1,50,000
(B) Maintenance Charges:
Repairs & maintenance including engine oil and
lubricants (Working Note 1) 28,560 p.a.
(C) Operating Charges:
Diesel (Working Note 2) 5,76,000
Total Cost (A + B + C) 13,31,520
Cost per month 1,10,960
(ii) Average cost per employee per month:

A. Employee coming from distance of upto 15 km
B. Employee coming from a distance beyond 15 km

= 1541.11 × 2 = ` 3,082.22
* Considering half fare employees as a base
Full fare employees (12 × 2) 24 employees
Add: Half fare employees (Working Note 3) 12 employees
Total Equivalent number of employees per month 36 employees
Total Equivalent number of employees per month
(morning + afternoon shift of company) 72 employees
Working Notes:
1. Calculation of Repairs and maintenance cost of a bus :
Distance travelled in a year:
(4 trip × 2 shifts × 30 km. × 20 days × 12 months)
Distance travelled p.a.: 57,600 km.

Repairs and maintenance cost per Bus per annum:
= × ` 2,856 per bus
= `28,560 per annum

2. Calculation of diesel cost per bus per annum:
Distance travelled in a year = 57,600 km
Diesel cost per Bus per annum:
= ×` 80
= 5,76,000
3. Calculation of equivalent number of employees per bus:
Seating capacity of a bus 30 employees
Occupancy (80% of capacity) 24 employees
Half fare employees (50% of 24 employees) 12 employees
Full fare employees (50% of 24 employees) 12 employee
Note: Total Equivalent number of employees per month (morning + afternoon shift of company can also be
calculated considering full fare employees as a base. In that case the number will be 36. Then fare for
employees coming from distance beyond 15km will be = ` 3,082.22 and employees coming from
distance upto 15 km will be 3,082.22 / 2 = ` 1,541.11].
Q-33 A Drug Store is presently selling three types of drugs namely ‘sDrug A’, ‘Drug B’ and ‘Drug C’. Due to
some constraints, it has decided to go for only one product line of drugs. It has provided the following
data for year 2020-21 for each product line:
Drugs Types
A B C
Revenues (in `) 74,50,000 1,11,75,000 1,86,25,000
Cost of goods sold (in `) 41,44,500 68,16,750 1,20,63,750
Number of purchase orders placed (in nos.) 560 810 630
Units sold (in Nos.) 1,75,200 1,50,300 1,44,500
Following additional information is also provided:
(` )
Drug Licence fee Drug Licence fee 5,00,000 To be distributed in ratio
2:3:5 between A, B and C
Ordering Placing of orders for purchases 8,30,000 2,000 purchase orders

Delivery Physical delivery and receipt

of foods 18,20,000 2,800 deliveries
Shelf stocking Stocking of goods 32,40,000 4,500 hours of shelf-stocking time
Customer Support Assistance provided to
customers 28,20,000 4,70,000 units sold
(i) Calculate the operating income and operating income as a percentage (%) of revenue of each
product line if:
(a) All the support costs (Other than cost of goods sold) are allocated in the ratio of cost of
goods sold.
(b) All the support costs (Other than cost of goods sold) are allocated using activity-based
costing system.
(ii) Give your opinion about choosing the product line on the basis of operat ing income as a percentage
(%) of revenue of each product line under both the situations as above.
Ans. (i) (a) Statement of Operating income and Operating income as a percentage of revenues for each
product line
Drug A (`) Drug B (`) Drug C (`) Total (`)
Revenues: (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost of Goods sold (COGS): (B) 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Total cost: (D) = {(B) + (C)} 58,02,300 95,43,450 1,68,89,250 3,22,35,000
Operating income: E = {(A)-(D)} 16,47,700 16,31,550 17,35,750 50,15,000
Operating income as a % of
revenues: (E/A) × 100) 22.12% 14.60% 9.32% 13.46%
Working notes:
(` )
Drug Licence Fee 5,00,000
Ordering 8,30,000
Delivery 18,20,000


Activity (1) Total cost (`) (2) Cost allocation base (3) Cost driver rate (4) = [(2) ÷ (3)]
Customer support 28,20,000 4,70,000 units sold ` 6 per unit sold
(b) Statement of Operating income and Operating income as a percentage of revenues for each product
line
Revenues: (A) 74,50,000 1,11,75,000 1,86,25,000 3,72,50,000
Cost & Goods sold 41,44,500 68,16,750 1,20,63,750 2,30,25,000
Drug Licence Fee 1,00,000 1,50,000 2,50,000 5,00,000
Ordering cost* (560:810:630) 2,32,400 3,36,150 2,61,450 8,30,000
Delivery cost* (950:1000:850) 6,17,500 6,50,000 5,52,500 18,20,000
Shelf stocking cost*
(900:1250:2350) 6,48,000 9,00,000 16,92,000 32,40,000
(175200:150300:144500) 10,51,200 9,01,800 8,67,000 28,20,000
Total cost: (B) 67,93,600 97,54,700 1,56,86,700 3,22,35,000
Operating income C: {(A) -(B)} 6,56,400 14,20,300 29,38,300 50,15,000
Operating income as a % of
revenues 8.81% 12.71% 15.78% 13.46%
(ii) Comparison on the basis of operating income as per the percentage (%) of revenue:
(a) When support costs are allocated to product lines on the basis of cost of goods sold of each product
On comparing the operating income as a % of revenue of each product, Drug A is the most profitable
product line, though its revenue is least but with highest units sold.
(b) When support costs are allocated to product lines using an activity-based costing system
Operating income as
a % of revenues 8.81% 12.71% 15.78% 13.46%
On comparing the operating income as a % of revenue of each product, Drug C is the most profitable
product line, though its unit sold is least but with highest revenue.
Q-34 YSPP Transport Company is running local city buses. It has a fleet of 20 Buses. Each bus can carry average
40 passengers per day and cover distance of 112.50 kms per day. Due to Covid-19 pandemic, the company
is running 90% buses on average.
Below are the operational expenses worked out for the month of November, 2021:

Original cost per bus ` 48,00,000

Insurance for 20 buses ` 63,36,000 per annum
Diesel & Oil ` 10 per km.
Salary of drivers per bus ` 25,000
Salary of cleaners per bus ` 15,000
Tyres and tubes ` 12,58,040
Lubricants ` 10,70,000
Repairs ` 24,70,000
Road tax per bus ` 1,50,000
Administrative overhead ` 50,88,000 per annum
Depreciation on buses is computed @ 20% using Straight Line Method.
Passenger tax is 15% on total taking.
Based on abovementioned information, you are required to COMPUTE the fare to be charged from
each passenger per kilometer assuming 25% margin on total taking (Total receipts from passengers.)
Ans. Operating Cost Statement
Particulars Total Cost Per Month (in `)
Fixed Charges:
Salary of Drivers (` 25,000 × 20 buses) 5,00,000
Salary of Cleaners (` 15,000 × 20 buses) 3,00,000
Road Tax (` 1,50,000 × 20 buses) 30,00,000
Insurance (‘ 63,36,000/12 months) 5,28,000
Administrative Overheads (` 50,88,000/12 months) 4,24,000

Total (A) 63,52,000
Variable Charges:
Diesel (60,750 km. × ` 10) 6,07,500
Tyres and Tubes 12,58,040
Lubricants 10,70,000
Repairs 24,70,000
Total (B) 54,05,540
Total Operating Cost (A+B) 1,17,57,540
Add: Passenger tax (Refer to WN-1) 29,39,385
Add: Profit (Refer to WN-1) 48,98,975
Total takings (C) 1,95,95,900
No. of passengers kms. in a month (D) 24,30,000
Cost per passenger km. (C/D) 8.06

Working Notes:
1. Let total takings be X then Passenger tax and profit will be as follows:
X = ` 1,17,57,540 + 0.15X + 0.25X
X – 0.40X = ` 1,17,57,540
X= = ` 1,95,95,900
Passenger tax = ` 1,95,95,900 × 0.15 = ` 29,39,385

Profit = ` 1,95,95,900 × 0.25 = ` 48,98,975
2. Total Kilometres to run during the month of November, 2021
= (112.50 km. × 30 days × 20 Buses) x 90% = 60,750 Kilometres
3. Total passenger Kilometres during the month of November, 2021
= 60,750 km. × 40 passengers = 24,30,000 Passenger- km.
---0---0---


CHAPTER - 11
JOINT PRODUCT AND BY PRODUCT
Q-1 In an Oil Mill four products emerge from a refining process. The total cost of input during the quarter
ending March 20X8 is `1,48,000. The output, sales and additional processing costs are as under:
Products Output in Litres Additional processing Sales value (`)
cost after split off (`)
ACH 8,000 43,000 1,72,500
BCH 4,000 9,000 15,000
CSH 2,000 - 6,000
DSH 4,000 1,500 45,000
In case these products were disposed-off at the split off point that is before further processing, the
selling price per litre would have been:
ACH (`) BCH (`) CSH (`) DSH (`)
15.00 6.00 3.00 7.50
PRODUCE a statement of profitability based on:
(i) If the products are sold after further processing is carried out in the mill.
(ii) If they are sold at the split off point.
Ans. (i) Statement of profitability of the Oil Mill (after carrying out further processing) for the quarter
ending 31st March 20X8.
Products Sales Value Share of Additional Total cost Profit (loss)
after further Joint cost processing after
processing cost processing
ACH 1,72,500 98,667 43,000 1,41,667 30,833
BCH 15,000 19,733 9,000 28,733 (13,733)
CSH 6,000 4,933 — 4,933 1,067
DSH 45,000 24,667 1,500 26,167 18,833
2,38,500 1,48,000 53,500 2,01,500 37,000

(ii) Statement of profitability at the split off point

Products Selling Output in Sales value share of joint Profit at split
price of units at split off cost off point
split off point
ACH 15.00 8,000 1,20,000 98,667 21,333
BCH 6.00 4,000 24,000 19,733 4,267
CSH 3.00 2,000 6,000 4,933 1,067
DSH 7.50 4,000 30,000 24,667 5,333
1,80,000 1,48,000 32,000
Note: Share of Joint Cost has been arrived at by considering the sales value at split off point.
Q-2 A Factory produces two products, ‘A’ and ‘B’ from a single process. The joint processing costs during a
particular month are :
Direct Material `30,000
Direct Labour ` 9,600
Variable Overheads ` 12,000
Fixed Overheads ` 32,000
Sales : A -100 units @ * 600 per unit; B - 120units @ ` 200 per unit
Apportion joints costs on the basis of:
(i) Physical Quantity of each product.
(ii) Contribution Margin method, and
(iii) Determine Profit or Loss under both the methods.
Ans. Total Joint Cost
Amount (`)
Direct Material 30,000
Direct Labour 9,600
Variable Overheads 12,000
Total Variable Cost 51,600
Fixed Overheads 32,000
Total joint cost 83,600
Apportionment of Joint Costs:
Product-A Product-B
I. (i) Apportionment of Joint Cost ` 38,000 ` 45,600
 ` 83.600   ` 83.600 
on the basis of ‘Physical Quantity’  ×100   ×120 
 100 + 120 units   100 + 120 units 
(ii) Apportionment of Joint Cost on the
basis of ‘Contribution Margin
Method’:
-366- Chapter-11 : Joint Product & By Product

- Variable Costs (on basis of ` 23,455 ` 28,145
 ` 51.600   ` 51.600 
physical units)  ×100   ×120 
 100 + 120 units   100 + 120 units 
Contribution Margin 36,545 ) -4,145
(` 600×100 – 23,455 (` 200×120 – 28,145)
Fixed Costs* ` 32,000
Total apportioned cost ` 55,455 ` 28,145
II. (iii) Profit or Loss:
When Joint cost apportioned on basis of physical units
A. Sales Value ` 60,000 ` 24,000
B. Apportioned joint cost on basis of
‘Physical Quantity’: ` 38,000 ` 45,600
A-B Profit or (Loss) 22,000 (21,600)
When Joint cost apportioned on basis of ‘Contribution Margin Method’
C Apportioned joint cost on basis of
‘Contribution Margin Method’ ` 55,455 ` 28,145
A-C Profit or (Loss) ` 4,545 ` (4,145)
* The fixed cost of ` 32,000 is to be apportioned over the joint products A and B in the ratio of their
contribution margin but contribution margin of Product B is Negative so fixed cost will be charged to
Product A only.
Q-3 A Factory is engaged in the production of chemical Bomex and in the course of its manufacture a by-
product Cromex is produced which after further processing has a commercial value. For the month of
April 2019 the following are the summarised cost data:
Joint Expenses Separate
(` ) Expenses (`)
Bomex Cromex
Materials 1,00,000 6,000 4,000
Labour 50,000 20,000 18,000
Overheads 30,000 10,000 6,000
Selling Price per unit 100 40
Estimated profit per unit on sale of Cromex 5
Number of units produced 2,000 2,000
Units Units
The factory uses net realisable value method for apportionment of joint cost to by-products.
You are required to prepare statements showing :
(i) Joint cost allocable to Cromex
(ii) Product wise and overall profitability of the factory for April 2019.

Ans.
(i) Statement Showing Joint Cost Allocation to ‘Cromex’
Particulars Cromex (`)
Sales (` 40 × 2,000 units) 80,000
Less: Post Split Off Costs (4,000 + 18,000 + 6,000) (28,000)
Less: Estimated Profit (` 5 × 2,000 units) (10,000)
Joint cost allocable 42,000
(ii) Statement Showing Product Wise and Overall Profitability
Particulars Bomex (`) Cromex (`) Total (`)
Sales 2,00,000 80,000 2,80,000
Less: Share in Joint Expenses (1,38,000)* (42,000) (1,80,000)
Less: Post Split Off Costs (36,000) (28,000) (64,000)
Profit 26,000 10,000 36,000
(*) 1,80,000 – 42,000
Q-4 How are By-products treated in Costing?
Ans. Treatment of by-product cost in Cost Accounting:
By-product cost can be dealt in cost accounting in the following ways:
(a) When they are of small total value: When the by-products are of small total value, the amount
realised from their sale may be dealt in any one the following two ways:
1. The sales value of the by-products may be credited to the Costing Profit and Loss Account
and no credit be given in the Cost Accounts. The credit to the Costing Profit and Loss Account
here is treated either as miscellaneous income or as additional sales revenue.
2. The sale proceeds of the by-product may be treated as deductions from the total costs. The
sale proceeds in fact should be deducted either from the production cost or from the cost of
sales.
(b) When the by-products are of considerable total value: Where by-products are of considerable
total value, they may be regarded as joint products rather than as by-products. To determine
exact cost of by-products the costs incurred upto the point of separation, should be apportioned
over by-products and joint products by using a logical basis.
(c) Where they require further processing: In this case, the net realisable value of the by-product at
the split-off point may be arrived at by subtracting the further processing cost from the realisable
value of by-products.
Q-5 Three products X,Y and Z alongwith a byproduct B are obtained again in a crude state which require
further processing at a cost of Rs. 5 for X; Rs. 4 for Y; and Rs. 2.50 for Z per unit before sale. The byproduct
is however saleable as such to a nearby factory. The selling prices for the three main products and
byproduct, assuming they should yield a net margin of 25 percent of cost, are fixed at Rs. 13.75 Rs. 8.75
and Rs. 7.50 and Re. 1.00 respectively – all per unit quantity sold.
During a period, the joint input cost including the material cost was Rs. 90,800 and the respective
outputs were:

X 8,000 units
Y 6,000 units
Z 4,000 units
B 1,000 units
By product should be credited to the joint cost and only the net joint costs are to be allocated to the
main products.
Calculate the joint cost per unit of each product and the margin available as a percentage on cost.
Ans. Machine running expenses per hour
Cost per month (Rs.) Cost per hour (Rs.)
Depreciation 4,000 20.00
 Rs.(5,00,000 - 20,000) 1   Rs.4,000 

    
 10 years 12 months   200 hours 
Wages 2,500 12.50
 Rs.2,500 
 
 200 hours 
Repairs & Maintenance 5,040 28.00
 Rs.60,480   Rs.5,040 
   
Consumable stores 3,960 22.00
 Rs.47,520   Rs. 3,960 

   
Power (25 units × Rs.2 × 180 hours) 9,000 50.00
Total Machine Expenses 24,500 132.50
Computation of Two – tier machine hour rate
Set up time rate per Running time rate per
machine hour machine hour
(Rs.) (Rs.)
Standing Charges 20.00 20.00
Machine expenses :
Depreciation 20.00 20.00
Repair and maintenance – 28.00
Consumable stores – 22.00
Power – 50.00
Machine hour rate of overheads 40.00 140.00
Wages 12.50 12.50
Comprehensive machine hour rate 52.50 152.50

Q-6 Describe net realizable value method of apportioning joint costs to by-products.
Ans. Net Realisable Value method : The realisation on the disposal of the by-product may be deducted from
the total cost of production so as to arrive at the cost of the main product. For example, the amount
realised by the sale of molasses in a sugar factory goes to reduce the cost of sugar produced in the
factory.
When the by-product requires some additional processing and expenses are incurred in making it
saleable to the best advantage of the concern, the expenses so incurred should be deducted from the
total value realised from the sale of the by -product and only the net realisations should be deducted
from the total cost of production to arrive at the cost of production of the main product.
Separate accounts should be maintained for collecting addit ional expenses incurred on:
(i) further processing of the by -product, and
(ii) selling, distribution and administration expenses attributable to the by -product.
Q-7 A company processes a raw material in its Department 1 to produce three products, viz. A, B and X at the
same split-off stage. During a period 1,80,000 kgs of raw materials were processed in Department 1 at
a total cost of ` 12,88,000 and the resultant output of A, B and X were 18,000 kgs, 10,000 kgs and 54,000
kgs respectively. A and B were further processed in Department 2 at a cost of `1,80,000 and `1,50,000
respectively.
X was further processed in Department 3 at a cost of `1,08,000. There is no waste in further processing.
The details of sales affected during the period were as under:
A B X
Quantity Sold (kgs.) 17,000 5,000 44,000
Sales Value (`) 12,24,000 2,50,000 7,92,000
There were no opening stocks. If these products were sold at split-off stage, the selling prices of A, B
and X would have been ` 50, ` 40 and ` 10 per kg respectively.
Required:
(i) Prepare a statement showing the apportionment of joint costs to A, B and X.
(ii) Present a statement showing the cost per kg of each product indicating joint cost and further processing
cost and total cost separately.
(iii) Prepare a statement showing the product wise and total profit for the period.
(iv) State with supporting calculations as to whether any or all the products should be further processed or
not.
Ans.
(i) Statement showing the apportionment of joint costs to A, B and X
Output (kg) 18,000 10,000 54,000 18,40,000
Sales value 9,00,000 4,00,000 5,40,000
at the point of (` 50 x 18,000) (` 40 x 10,000) (` 10 x 54,000)
split off (`)
Joint cost 6,30,000 2,80,000 3,78,000 12,88,000
apportionment

 ` 12,88,000   ` 12,88,000   ` 12,88,000 

on the basis of sales  `9,00,000   ` 18,40,000 `4,00,000   ` 18,40,000 `5, 40, 000 
 ` 18,40, 000     
value at the
point of split off (`)
(ii) Statement showing the cost per kg. of each product
(indicating joint cost; further processing cost and total cost separately)
Products A B X
Joint costs apportioned (`) : (I) 6,30,000 2,80,000 3,78,000
Production (kg) : (II) 18,000 10,000 54,000
Joint cost per kg (`): (I ÷ II) 35 28 7
Further processing Cost per kg. (`) 10 15 2
 ` 1,80,000   ` 1,50,000   ` 1,08,000 

     
 18,000 kg   10,000 kg   54,000 kg 
Total cost per kg (`) 45 43 9

(iii) Statement showing the product wise and total profit for the period
Sales value (`) 12,24,000 2,50,000 7,92,000
Add: Closing stock value (`)
(Refer to Working note 2) 45,000 2,15,000 90,000
Value of production (`) 12,69,000 4,65,000 8,82,000 26,16,000
Apportionment of joint cost (`) 6,30,000 2,80,000 3,78,000
Add: Further processing cost (`) 1,80,000 1,50,000 1,08,000
Total cost (`) 8,10,000 4,30,000 4,86,000 17,26,000
Profit (`) 4,59,000 35,000 3,96,000 8,90,000
Working Notes
1.
Products A B X
Sales value (`) 12,24,000 2,50,000 7,92,000
Quantity sold (Kgs.) 17,000 5,000 44,000
Selling price `/kg 72 50 18
 ` 12,24,000   ` 2,50,000   ` 7,92,000 

     
 17,000 kg   5,000 kg   44,000 kg 
2. Valuation of closing stock:
Since the selling price per kg of products A, B and X is more than their total costs, therefore closing
stock will be valued at cost.

Closing stock 1,000 5,000 10,000
(kgs.)
Cost per kg (`) 45 43 9
Closing stock value (`) 45,000 2,15,000 90,000 3,50,000
(` 45 x 1,000 kg) (` 43 x 5,000 kg) (`9x10,000 kg)
(iv) Calculations for processing decision
Products A B X
Selling price per kg at the point of split off (`) 50 40 10
Selling price per kg after further processing (`)
(Refer to working Note 1) 72 50 18
Incremental selling price per kg (`) 22 10 8
Less: Further processing cost per kg (`) (10) (15) (2)
Incremental profit (loss) per kg (`) 12 (5) 6
Product A and X has an incremental profit per unit after further processing, hence, these two products
may be further processed. However, further processing of product B is not profitable hence, product B
shall be sold at split off point.
Q-8 In an Oil Mill, four products emerge from a refining process. The total cost of input during the quarter
ending March 2019 is Rs.22,20,000. The output, sales and additional processing costs are as under:
Products Output in Additional processing Sales value (Rs.)
Litres cost after split off (Rs.)
A 8,000 6,45,000 25,87,500
B 4,000 1,35,000 2,25,000
C 2,000 - 90,000
D 4,000 22,500 6,75,000
In case these products were disposed-off at the split off point that is before further processing, the
selling price per litre would have been:
A (Rs.) B (Rs.) C (Rs.) D (Rs.)
225.00 90.00 45.00 112.50
PREPARE a statement of profitability based on:
(i) If the products are sold after further processing is carried out in the mill.
(ii) If they are sold at the split off point.
Ans. Statement of profitability of an Oil Mill (after carrying out further processing) for the quarter ending
31st March 2019.
Products Sales Value after Share of Joint Additional Total cost Profit (loss)
further cost processing after
processing cost processing
A 25,87,500 14,80,000 6,45,000 21,25,000 4,62,500
B 2,25,000 2,96,000 1,35,000 4,31,000 (2,06,000)
C 90,000 74,000 - 74,000 16,000
D 6,75,000 3,70,000 22,500 3,92,500 2,82,500
35,77,500 22,20,000 8,02,500 30,22,500 5,55,000

(ii) Statement of profitability at the split off point

Products Selling Output in Sales value at Share of joint Profit at split
price of units split off point cost off point
split off
A 225.00 8,000 18,00,000 14,80,000 3,20,000
B 90.00 4,000 3,60,000 2,96,000 64,000
C 45.00 2,000 90,000 74,000 16,000
D 112.50 4,000 4,50,000 3,70,000 80,000
- - 27,00,000 22,20,000 4,80,000
Note: Share of Joint Cost has been arrived at by considering the sales value at split off point.
Q-9 ‘Buttery Butter’ is engaged in the production of Buttermilk, Butter and Ghee. It purchases processed
cream and let it through the process of churning until it separates into buttermilk and butter. For the
month of January, 2020, ‘Buttery Butter’ purchased 50 Kilolitre processed cream @ ` 100 per 1000 ml.
Conversion cost of ` 1,00,000 were incurred up-to the split off point, where two saleable products were
produced i.e. buttermilk and butter. Butter can be further processed into Ghee.
The January, 2020 production and sales information is as follows:
Products Production (in Sales Quantity (in Selling price per
Kilolitre/tonne) Kilolitre/tonne) Litre/Kg (`)
Buttermilk 28 28 30
Butter 20 — —
Ghee 16 16 480
All 20 tonne of butter were further processed at an incremental cost of ` 1,20,000 to yield 16 Kilolitre
of Ghee. There was no opening or closing inventories of buttermilk, butter or ghee in January, 2020.
Required:
(i) SHOW how joint cost would be apportioned between Buttermilk and Butter under Estimated Net
Realisable Value method.
(ii) ‘Healthy Bones’ offers to purchase 20 tonne of butter in February at ` 360 per kg. In case ‘Buttery
Butter’ accepts this offer, no Ghee would be produced in February. SUGGEST whether ‘Buttery
Butter’ shall accept the offer affecting its operating income or further process butter to make
Ghee itself?
Ans. (i) Estimated Net Realisable Value Method:
Buttermilk Butter
Sales Value 8,40,000 76,80,000
(` 30 × 28 × 1000) (` 480 × 16 × 1000)
Less: Post split-off cost (Further processing cost) - (1,20,000)
Net Realisable Value 8,40,000 75,60,000
Apportionment of Joint Cost of ` 51,00,000* in ratio of 1:9 5,10,000 45,90,000
* [(` 100 × 50 × 1000) + ` 1,00,000] = ` 51,00,000

(ii) Incremental revenue from further processing of Butter into Ghee

(` 480 × 16 × 1000 - ` 360 × 20 × 1000) ` 4,80,000
Less: Incremental cost of further processing
of Butter into Ghee ` 1,20,000
Incremental operating income from further processing `3,60,000
The operating income of ‘Buttery Butter’ will be reduced by `3,60,000 in February if it sells 20
tonne of Butter to ‘Healthy Bones’, instead of further processing of Butter into Ghee for sale.
Thus, ‘Buttery Butter’ is advised not to accept the offer and further process butter to make Ghee
itself.
Q-10 ABC Ltd. operates a simple chemical process to convert a single material into three separate items,
referred to here as X, Y and Z. All three end products are separated simultaneously at a single split-off
point.
Product X and Y are ready for sale immediately upon split off without further processing or any other
additional costs. Product Z, however, is processed further before being sold. There is no available
market price for Z at the split -off point.
The selling prices quoted here are expected to remain the same in the coming year. During 2019-20, the
selling prices of the items and the total amounts sold were:
X – 186 tons sold for `3,000 per ton
Y – 527 tons sold for `2,250 per ton
Z – 736 tons sold for `1,500 per ton
The total joint manufacturing costs for the year were ` 12,50,000. An additional ` 6,20,000 was spent to
finish product Z.
There were no opening inventories of X, Y or Z at the end of the year. The following inventories of
complete units were on hand:
X 180 tons
Y 60 Tons
Z 25 tons
There was no opening or closing work-in-progress.
Required:
COMPUTE the cost of inventories of X, Y and Z and cost of goods sold for year ended March 31, 2020,
using Net realizable value (NRV) method of joint cost allocation.
Ans.(i) (a) Statement of Joint Cost allocation of inventories of X, Y and Z
(By using Net Realisable Value Method)
Products
Total
X Y Z
(` ) (` ) (` ) (` )
Final sales value of 10,98,000 13,20,750 11,41,500 35,60,250
total production (366 × `3,000) (587 × ` 2,250) (761 × ` 1,500)
(Working Note 1)
Less: Additional cost — — (6,20,000) (6,20,000)
Net realisable value 10,98,000 13,20,750 5,21,500 29,40,250
(at split-off point)
Joint cost allocated 4,66,797 5,61,496 2,21,707 12,50,000
(Working Note 2)

Cost of goods sold as on March 31, 2020

(By using Net Realisable Value Method)
Products
Total
X Y Z
(` ) (` ) (` ) (` )
Allocated joint cost 4,66,797 5,61,496 2,21,707 12,50,000
Additional costs — — 6,20,000 6,20,000
Cost of goods 4,66,797 5,61,496 8,41,707 18,70,000
available for sale (CGAS)
Less: Cost of 2,29,571 57,385 27,692 3,14,648
ending inventory (CGAS×49.18%) (CGAS × 10.22%) (CGAS × 3.29%)
(Working Note 1)
Cost of goods sold 2,37,226 5,04,111 8,14,015 15,55,352
Working Notes
1. Total production of three products for the year 2019-2020
Products Quantity Quantity of ending Total Ending inventory
sold in tones inventory in tons production percentage (%)
(1) (2) (3) (4) = [(2) + (3)} (5) = (3)/(4)
X 186 180 366 49.18
Y 527 60 587 10.22
Z 736 25 761 3.29
2. Joint cost apportioned to each product:
Total Joint cost

×Net Realisable Value of each product
Total Net Realisable Value
12, 50,000
Total cost of Product X = × ` 10,98,000 - ` 4,66,797
` 29, 40,250
12, 50,000
Total cost of Product Y = × ` 13,20,750 - `5,61,496
` 29,40,250
12,50, 000
Total cost of Product Z = × ` 5,21, 500 - `2,21,707
` 29, 40,250

Q-11 How apportionment of joint costs up-to the point of separation amongst the joint products using
market value at the point of separation and net realizable value method is done?
Ans. Apportionment of Joint Cost amongst Joint Products using:
Market value at the point of separation: This method is used for apportionment of joint costs to joint
products upto the split off point. It is difficult to apply if the market value of the product at the point of
separation is not available. It is useful method where further processing costs are incurred
disproportionately.
Net realizable value Method: From the sales value of joint products (at finished stage) the followings
are deducted:
- Estimated profit margins
- Selling & distribution expenses, if any
- Post- split off costs.
The resultant figure so obtained is known as net realizable value of joint products. Joint costs are
apportioned in the ratio of net realizable value.
Q-12 Answer the following:
A factory produces two products, `Ghee’ and `Cream’ from a single process. The joint processing costs
during a particular month are:
Direct Material ` 60,000
Direct Labour ` 19,200
Variable Overheads ` 24,000
Fixed Overheads ` 64,000
Sales: Ghee - 200 litre @ ` 600 per litre; Cream – 240 litre @ ` 200 per litre.
REQUIRED:
I. Apportion joints costs on the basis of:
(i) Physical Quantity of each product.
(ii) Contribution Margin method, and
II. Determine Profit or Loss under both the methods.
Ans. Total Joint Cost
Direct Material 60,000
Direct Labour 19,200
Variable Overheads 24,000
Total Variable Cost 1,03,200
Fixed Overheads 64,000
Total joint cost 1,67,200
Apportionment of Joint Costs:
Product-Ghee Product-Cream
I. (i) Apportionment of Joint `76,000 `91,200
Cost on the basis of
`Physical Quantity’
(ii) Apportionment of Joint

Cost on the basis of

`Contribution Margin
Method’ :
- Variable Costs (on ` 46,909 ` 56,291
basis of physical units)
Contribution Margin 73,091 - 8,291

(` 600 x 200 - 46,909) (` 200 x 240 - 56,291)
Fixed Costs* ` 64,000
Total apportioned cost ` 1,10,909 ` 56,291
II. (iii) Profit or Loss:
When Joint cost apportioned on basis of physical units
A. Sales Value ` 1,20,000 ` 48,000
B. Apportioned joint cost on ` 76,000 ` 91,200
basis of `Physical Quantity’ :
A-B Profit or (Loss) 44,000 (43,200)
When Joint cost apportioned on basis of `Contribution Margin Method’
C Apportioned joint cost on ` 1,10,909 ` 56,291
basis of `Contribution
Margin Method’
A-C Profit or (Loss) ` 9,091 ` (8,291)
* The fixed cost of ` 64,000 is to be apportioned over the joint products- Ghee and Cream in the ratio of
their contribution margin but contribution margin of Product- Cream is Negative so fixed cost will be
charged to Product- Ghee only.
Q-13 OPR Ltd. purchases crude vegetable oil. It does refining of the same. The refining process results in
four products at the spilt-off point - S, P, N and A. Product `A’ is fully processed at the split-off point.
Product S, P and N can be individually further refined into SK, PM, and NL respectively. The joint cost of
purchasing the crude vegetable oil and processing it were ` 40,000. Other details are as follows:
Product Further processing costs Sales at split-off point Sales after further
(` ) (` ) processing (`)
S 80,000 20,000 1,20,000
P 32,000 12,000 40,000
N 36,000 28,000 48,000
A - 20,000 -
You are required to identify the products which can be further processed for maximizing profits and
make suitable suggestions.
Ans. Statement of Comparison of Profits before and after further processing
S (`) P (`) N (`) A (`) Total (`)
A. Sales at split off point 20,000 12,000 28,000 20,000 80,000
B. Apportioned Joint Costs
(Refer Working Note) 10,000 6,000 14,000 10,000 40,000
C. Profit at split-off point 10,000 6,000 14,000 10,000 40,000

D. Sales after further

processing 1,20,000 40,000 48,000 - 2,08,000
E. Further processing cost 80,000 32,000 36,000 - 1,48,000
F. Apportioned Joint Costs
(Refer Working Note) 10,000 6,000 14,000 - -
G. Profit if further processing
(D – E + F) 30000 2,000 (-) 2,000 - -
H. Increase/ decrease in profit
after further processing (GC) 20,000 - 4000 - 16,000 - -
Suggested Product to be further processed for maximising profits:
On comparing the figures of “Profit if no further processing” and “Profits if further processing”, one
observes that OPR Ltd. is earning more after further processing of Product S only i.e. ` 20,000. Hence,
for maximizing profits, only Product S should be further processed and Product P, N and A should be
sold at split -off point.
Working Note:
Apportionment of joint costs on the basis of Sales Value at split -off point
Apportioned joint cost = Total joint cost × Sales value of each product
Total Sales value at split-off point
Where,
Total Joint cost = ` 40,000
Total sales at split off point (S, P, N and A) = 20,000 + 12,000 + 28,000 + 20,000 = ` 80,000
` 40,000
Share of S in joint cost = x ` 20,000 = ` 10,000
`80,000
` 40,000
Share of P in joint cost = x ` 12,000 = ` 6,000
`80,000
` 40,000
Share of N in joint cost = x ` 28,000 = ` 14,000
`80,000
` 40,000
Share of A in joint cost = x ` 20,000 = ` 10,000
`80,000
Decision for further processing of Product S, P and N
Products S (`) P (`) N (`)
Sales revenue after further processing 1,20,000 40,000 48,000
Less: sales value at split-off point 20,000 12,000 28,000
Incremental Sales Revenue 1,00,000 28,000 20,000
Less: Further Processing cost 80,000 32,000 36,000
Profit/ loss arising due to further processing 20,000 (-)4,000 (-)16,000
Suggested Product to be further processed for maximising profits:
On comparing the figures of “Profit if no further processing” and “Profits if further processing”, one
observes that OPR Ltd. is earning more after further processing of Product S only i.e. ` 20,000. Hence,
for maximizing profits, only Product S should be further processed and Product P, N and A should be
sold at split -off point.

Q-14 Mayura Chemicals Ltd buys a particular raw material at ` 8 per litre. At the end of the processing in
Department- I, this raw material splits-off into products X, Y and Z. Product X is sold at the split-off
point, with no further processing. Products Y and Z require further processing before they can be sold.
Product Y is processed in Department-2, and Product Z is processed in Department-3. Following is a
summary of the costs and other related data for the year 2019-20:
Particulars Department
1 2 3
Cost of Raw Material ` 4,80,000 - -
Direct Labour ` 70,000 ` 4,50,000 ` 6,50,000
Manufacturing Overhead ` 48,000 ` 2,10,000 ` 4,50,000
Products
X Y Z
Sales (litres) 10,000 15,000 22,500
Closing inventory (litres) 5,000 - 7,500
Sale price per litre (`) 30 64 50
There were no opening and closing inventories of basic raw materials at the beginning as well as at the
end of the year. All finished goods inventory in litres was complete as to processing. The company uses
the Net-realisable value method of allocating joint costs.
(i) Schedule showing the allocation of joint costs.
(ii) Calculate the Cost of goods sold of each product and the cost of each item in Inventory.
(iii) A comparative statement of Gross profit.
Ans. (i) Statement of Joint Cost allocation of inventories of X, Y and Z
Products Total
X (`) Y (`) Z (`) (`)
Final sales value of 4,50,000 9,60,000 15,00,000 29,10,000
total production (15,000 x ` 30) (15,000 x ` 64) (30,000 x ` 50)
(Working Note 1)
Less: Additional cost — 6,60,000 11,00,000 17,60,000
Net realisable value 4,50,000 3,00,000 4,00,000 11,50,000
(at split-off point)
Joint cost allocated 2,34,000 1,56,000 2,08,000 5,98,000

(Working Note 2)
(ii) Calculation of Cost of goods sold and Closing inventory
Products Total
X (`) Y (`) Z (`) (`)
Allocated joint cost 2,34,000 1,56,000 2,08,000 5,98,000
Add: Additional costs — 6,60,000 11,00,000 17,60,000
Cost of goods sold
(COGS) 2,34,000 8,16,000 13,08,000 23,58,000
Less: Cost of closing inventory 78,000 — 3,27,000 4,05,000
(Working Note 1) (COGS × 100/3%) (COGS × 25%)
Cost of goods sold 1,56,000 8,16,000 9,81,000 19,53,000

(iii) Comparative Statement of Gross Profit

Products Total
X (`) Y (` ) Z (`) (`)
Sales revenue 3,00,000 9,60,000 11,25,000 23,85,000
(10,000 x ` 30) (15,000 x ` 64) (22,500 x ` 50)
Less: Cost of goods sold 1,56,000 8,16,000 9,81,000 19,53,000
Gross Profit 1,44,000 1,44,000 1,44,000 4,32,000
Working Notes:
1. Total production of three products for the year 2019-2020
Products Quantity Quantity of Total Closing
sold in closing inventory production inventory
litres in litres percentage (%)
(1) (2) (3) (4) = [(2) + (3)} (5) = (3)/ (4)
X 10,000 5,000 15,000 100/3
Y 15,000 — 15,000 —
Z 22,500 7,500 30,000 25
2. Joint cost apportioned to each product:
= Total Joint cost x Net Realisable Value of each product
Total Net Realisable Value
Joint cost of product X = x ` 4,50,000 = ` 2,34,000
Joint cost of product Y = x ` 3,00,000 = ` 1,56,000
Joint cost of product Z = x ` 4,00,000 = ` 2,08,000
Q-15 A company’s plant processes 6,750 units of a raw material in a month to produce two products `M’ and
`N’.
The process yield is as under:
Product M 80%
Product N 12%
Process Loss 8%
The cost of raw material is ` 80 per unit.
Processing cost is ` 2,25,000 of which labour cost is accounted for 66%. Labour is
chargeable to products `M’ and `N’ in the ratio of 100:80.
Prepare a Comprehensive Cost Statement for each product showing:
(i) Apportionment of joint cost among products `M’ and `N’ and

(ii) Total cost of the products `M’ and `N’.

Ans. Comprehensive Cost Statement
Particulars Total Cost Product-M Product-N
(` ) (` ) (` )
No. of units produced * 5,400 units 810 units
Cost of raw material (` 80 × 6,750 units) 5,40,000
Processing cost:
- Labour cost (` 2,25,000 × 66%) 1,48,500
- Other costs (` 2,25,000 - 1,48,500) 76,500
Total joint cost 7,65,000
(i) Apportionment of joint costs
between the joint products
Labour cost in the ratio of 100:80 1,48,500 82,500 66,000
 1,48,500  100   1,48,500  80 
   
 180   180 
Other joint costs (including material) 6,16,500 5,36,087 80,413
 6,16,500  5,400   6,16,500  810 

in the ratio of output    
 6,210   6,210 
(ii) Total product cost 7,65,000 6,18,587 1,46,413

* No. of units produced of Product M = 6750 units x 80% = 5400 units
No. of units produced of Product N = 6750 units x 12% = 810 units
Q-16 A company produces two joint products A and B from the same basic materials. The processing is
completed in three departments.
Materials are mixed in Department I. At the end of this process, A and B get separated.
After separation, A is completed in the Department II and B in Department III. During a period, 4,00,000
kg of raw material was processed in Department I at a total cost of ` 17,50,000, and the resultant 50%
becomes A and 40% becomes B and 10% normally lost in processing.
In Department II, 1/5th of the quantity received from Department I is lost in processing. A is further
processed in Department II at a cost of ` 2,60,000.
In Department III, further new material is added to the material received from Department I and
weight mixture is doubled, there is no quantity loss in the department III. Further processing cost
(with material cost) in Department III is ` 3,00,000.
The details of sales during the said period are:
Product A Product B
Quantity sold (kg) 1,50,000 3,00,000
Sales price per kg (`) 10 4
There were no opening stocks. If these products sold at split -off-point, the selling price of A and B
would be ` 8 and ` 4 per kg respectively.
Required:
(i) PREPARE a statement showing the apportionment of joint cost to A and B in proportion of sales

value at split off point.

(ii) PREPARE a statement showing the cost per kg of each product indicating joint cost, processing cost
and total cost separately.
(iii) PREPARE a statement showing the product wise profit for the year.
(iv) On the basis of profits before and after further processing of product A and B, give your COMMENT
that products should be further processed or not.
Ans. Calculation of quantity produced
Dept I (kg) Dept II (kg) Dept III (kg)
Input 4,00,000 2,00,000 1,60,000
(50% of 4,00,000 kg.) (40% of 4,00,000 kg.)
Weight (lost) or added (40,000) (40,000) 1,60,000
(10% of 4,00,000 kg.) (1/5th of 2,00,000 kg.)
3,60,000 1,60,000 3,20,000
Production of A 2,00,000 1,60,000 —
Production of B 1,60,000 — 3,20,000
(i) Statement of apportionment of joint cost of dept I
Product A Product B
Output (kg) 2,00,000 1,60,000
Selling price per kg (`) 8 4
Sales value (`) 16,00,000 6,40,000
Share in Joint cost (5:2) 12,50,000 5,00,000
(` 17,50,000 × 5 ÷ 7) (` 17,50,000 × 2 ÷ 7)
(ii) Statement of cost per kg
Product A Product B
Output (kg) 1,60,000 3,20,000
Share in joint cost (`) 12,50,000 5,00,000
Joint Cost per kg (`) (A) 7.8125 1.5625
Further processing cost (`) 2,60,000 3,00,000
Further processing cost per kg (` ) (B) 1.625 0.9375
Total cost per kg (`) {(A)+(B)} 9.4375 2.5000
(iii) Statement of profit
Product A Product B
Output (kg) 1,60,000 3,20,000
Sales (kg) (1,50,000) (3,00,000)
Closing stock (kg) 10,000 20,000
(` ) (` )
Sales 15,00,000 12,00,000
(1,50,000 kg × ` 10) (3,00,000 kg × ` 4)

Add: closing stock (at full cost) 94,375 50,000

(10,000 kg × ` 9.4375) (20,000 kg × ` 2.5)
Value of production 15,94,375 12,50,000
Less: Share in joint cost 12,50,000 5,00,000
Further processing cost 2,60,000 3,00,000
Profit 84,375 4,50,000
(iv) Profitability statement before and after processing
Product A Product B
Before (`) After (`) Before (`) After (`)
Sales Value 16,00,000 6,40,000
Share in joint costs 12,50,000 5,00,000
Profit 3,50,000 84,375 1,40,000 4,50,000
(as per iii above) (as per iii above)
Product A should be sold at split off point and product B after processing because of higher profitability.
Q-17 HOW apportionment of joint costs upto the point of separation amongst the joint products using
market value at the point of separation and net realizable value method is done? DISCUSS.
Ans. Apportionment of Joint Cost amongst Joint Products using:
Market value at the point of separation: This method is used for apportionment of joint costs to joint
products upto the split off point. It is difficult to apply if the market value of the product at the point of
separation is not available. It is useful method where further processing costs are incurred
disproportionately.
Net realizable value Method: From the sales value of joint products (at finished stage) the followings
are deducted:
- Estimated profit margins
- Selling & distribution expenses, if any
- Post split off costs.
The resultant figure so obtained is known as net realizable value of joint products.
Joint costs are apportioned in the ratio of net realizable value.
Q-18 Following information is available for A Ltd.:
Sales-
P: 200 kg @ ` 120 per kg.
Q: 240 kg @ ` 60 per kg.
Joint costs-
Marginal cost ` 17,600
Fixed cost ` 15,600
You are required to FIND OUT the cost of joint products P and Q using contribution margin method.
Ans. The marginal cost (variable cost) of `17,600 is apportioned over the joint products P and Q in the ratio
of their physical quantity i.e. 200 : 240
Marginal cost for Product P : ` 17,600 × 200/440 = ` 8,000
Marginal cost for Product Q : ` 17,600 × 240/440 = ` 9,600
The fixed cost of ` 15,600 is apportioned over the joint products P and Q in the ratio of their contribution
margin i.e. 160 : 48 (Refer to working note)

Product P : ` 15,600 × 160/208 = ` 12,000

Product Q : ` 15,600 × 48/208 = ` 3,600
Working Note:
Computation of contribution margin ratio
Products Sales revenue Marginal cost Contribution
(` ) (` ) (` )
P 24,000 8,000 16,000
Q 14,400 9,600 (Refer to above) 4,800
Contribution ratio is 160 : 48
Q-19 Mili Ltd., a manufacturing company, produces two main products and a by-product out of a joint process.
The ratio of output quantities to input quantities of direct material used in the joint process remains
consistent on yearly basis.
Company has employed the physical volume method to allocate joint production costs to the main
products. The net realizable value of the by-product is used to reduce the joint production costs before
the joint costs are allocated to the main products.
During a month, company incurred joint production costs of ` 15,00,000. The main products are not
marketable at the split off point and thus have to be processed further. Details of company’s operation
are given in the table below.
Particulars Product-Q Product-R By product
Monthly output in kg. 90,000 1,80,000 75,000
Selling price per kg. ` 50 ` 30 `5
Process costs ` 3,00,000 ` 4,50,000
FIND OUT the amount of joint product cost that Mili Ltd. would allocate to product-R by using the
physical volume method to allocate joint production costs?
Ans. Calculation of Net joint costs to be allocated:
Joint Costs 15,00,000
Less: Net Realizable value of by-product (75,000 × 5) 3,75,000
Net joint costs to be allocated 11,25,000
Therefore, amount of joint product cost that Mili Ltd. would allocate to the product-R by using the
physical volume method to allocate joint production costs:
---0---0---

CHAPTER- 12
SERVICE COSTING
Q-1 AD Higher Secondary School (AHSS) offers courses for 11th & 12th standard in three streams i.e. Arts,
Commerce and Science. AHSS runs higher secondary classes alongwith primary and secondary classes
but for accounting purpose it treats higher secondary as a separate responsibility centre. The Managing
committee of the school wants to revise its fee structure for higher secondary students. The accountant
of the school has provided the following details for a year:
Amount (`)
Teachers’ salary (15 teachers × `35,000 × 12 months) 63,00,000
Principal’s salary 14,40,000
Lab attendants’ salary (2 attendants × `15,000 × 12 months) 3,60,000
Salary to library staff 1,44,000
Salary to peons (4 peons × ` 10,000 × 12 months) 4,80,000
Salary to other staffs 4,80,000
Examinations expenditure 10,80,000
Office & Administration cost 15,20,000
Annual day expenses 4,50,000
Sports expenses 1,20,000
Other information:
(i)
Standard 11 & 12 Primary & Secondary
Arts Commerce Science
No. of students 120 360 180 840
Lab classes in a year 0 0 144 156
No. of examinations in a year 2 2 2 2
Time spent at library per student
per year 180 hours 120 hours 240 hours 60 hours
Time spent by principal for
administration 208 hours 312 hours 480 hours 1,400 hours
Teachers for 11 & 12 standard 4 5 6 -
(ii) One teacher who teaches economics for Arts stream students also teaches commerce stream students.
The teacher takes 1,040 classes in a year, it includes 208 classes for commerce students.
(iii) There is another teacher who teaches mathematics for Science stream students also teaches business
mathematics to commerce stream students. She takes 1,100 classes a year, it includes 160 classes for
commerce students.

(iv) One peon is fully dedicated for higher secondary section. Other peons dedicate their 15% time for
higher secondary section.
(v) All school students irrespective of section and age participate in annual functions and sports activities.
Requirement:
(a) CALCULATE cost per student per annum for all three streams.
(b) If the management decides to take uniform fee of ` 1,000 per month from all higher secondary
students, CALCULATE stream wise profitability.
(c) If management decides to take 10% profit on cost, COMPUTE fee to be charged from the students
of all three streams respectively.
Ans. Calculation of Cost per annum
Particulars Arts (`) Commerce (`) Science (`) Total (`)
Teachers’ salary (W.N-1) 16,80,000 21,00,000 25,20,000 63,00,000
Re-apportionment of
Economics & Mathematics
teachers’ salary (W.N- 2) (84,000) 1,45,091 (61,091) -
Principal’s salary (W.N-3) 1,24,800 1,87,200 2,88,000 6,00,000
Lab assistants’ salary (W.N-4) - - 1,72,800 1,72,800
Salary to library staff (W.N-5) 43,200 28,800 57,600 1,29,600
Salary to peons (W.N-6) 31,636 94,909 47,455 1,74,000
Salary to other staffs (W.N-7) 38,400 1,15,200 57,600 2,11,200
Examination expenses (W.N- 8) 86,400 2,59,200 1,29,600 4,75,200
Office & Administration
expenses (W.N- 7) 1,21,600 3,64,800 1,82,400 6,68,800
Annual Day expenses (W.N-7) 36,000 1,08,000 54,000 1,98,000
Sports expenses (W.N- 7) 9,600 28,800 14,400 52,800
Total Cost per annum 20,87,636 34,32,000 34,62,764 89,82,400
(a) Calculation of cost per student per annum
No. of students 120 360 180 660
Cost per student per annum 17,397 9,533 19,238 13,610
(b) Calculation of profitability
Total Fees per annum 12,000 12,000 12,000
Cost per student per annum 17,397 9,533 19,238
Profit/ (Loss) per student per annum (5,397) 2,467 (7,238)
No. of students 120 360 180
Total Profit/ (Loss) (6,47,640) 8,88,120 (13,02,840) (10,62,360)
-386- Chapter-12 : Service Costing

(c) Computation of fees to be charged to earn a 10% profit on cost

Particulars Arts (`) Commerce (`) Science (`)
Add: Profit @10% 1,740 953 1,924
Fees per annum 19,137 10,486 21,162
Fees per month 1,595 874 1,764
Working Notes:
(1) Teachers’ salary
Particulars Arts Commerce Science
No. of teachers 4 5 6
Salary per annum (`) 4,20,000 4,20,000 4,20,000
Total salary 16,80,000 21,00,000 25,20,000
(2) Re-apportionment of Economics and Mathematics teachers’ salary
Economics Mathematics
Particulars Arts Commerce Science Commerce
No. of classes 832 208 940 160
Salary re-apportionment (`) (84,000) 84,000 (61,091) 61,091
 ` 4,20,000   ` 4,20,000 
 1,040 ×208   1,00 ×160 
   
Total addition to Commerce stream = ` 84,000 + ` 61,091 = ` 1,45,091
(3) Principal’s salary has been apportioned on the basis of time spent by him for administration of
classes.
(4) Lab attendants’ salary has been apportioned on the basis of lab classes attended by the students.
(5) Salary of library staffs are apportioned on the basis of time spent by the students in library.
(6) Salary of Peons are apportioned on the basis of number of students. The peons’ salary allocable to
higher secondary classes is calculated as below:
Amount ( `)
Peon dedicated for higher secondary (1 peon × `10,000 × 12 months) 1,20,000
Add: 15% of other peons’ salary {15% of (3 peons × `10,000 × 12 months)} 54,000
1,74,000
(7) Salary to other staffs, office & administration cost, Annual day expenses and sports expenses are
apportioned on the basis of number of students.
(8) Examination Expenses has been apportioned taking number of students and number of examinations
into account.
Q-2 A transport company has a fleet of four trucks of 10 tonne capacity each plying in different directions
for transport of customer’s goods. The trucks run loaded with goods and return empty. The distance
travelled, number of trips made and the load carried per day by each truck are as under:

Truck No. One way No. of trips Load carried

Distance Km per day per trip / day tonnes
1 48 4 6
2 120 1 9
3 90 2 8
4 60 4 8
The analysis of maintenance cost and the total distance travelled during the last two years is as under
Year Total distance travelled Maintenance Cost `
1 1,60,200 1,38,150
2 1,56,700 1,35,525
The following are the details of expenses for the year under review:
Diesel ` 60 per litre. Each litre gives 4 km per litre of diesel on anaverage.
Driver’s salary ` 22,000 per truck per month
Licence and taxes ` 15,000 per annum per truck
Insurance ` 80,000 per annum for all the four trucks
Purchase Price pertruck ` 30,00,000, Life 10 years. Scrap value at the end of life is ` 1,00,000.
Oil and sundries ` 525 per 100 km run.
General Overhead ` 1,10,840 per annum
The trucks operate 24 days per month on an average.
Required
(i) PREPARE an Annual Cost Statement covering the fleet of four trucks
(ii) CALCULATE the cost per km. run.
(iii) DETERMINE the freight rate per tonne km. to yield a profit of 30% on freight. ss
Ans. (i) Annual Cost Statement of four vehicles
(` )
Diesel {(4,21,632 km. ÷ 4 km) × ` 60) (Refer to Working Note 1) 63,24,480
Oil & sundries {(4,21,632 km. ÷ 100 km.) × ` 525} 22,13,568
Maintenance {(4,21,632 km. × ` 0.75) + ‘ 18,000}(Refer to Working Note 2) 3,34,224
Drivers’ salary {(`22,000 × 12 months) × 4 trucks} 10,56,000
Licence and taxes (` 15,000 × 4 trucks) 60,000
Insurance 80,000
Depreciation {(`29,00,000 ÷ 10 years) × 4 trucks} 11,60,000
General overhead 1,10,840
Total annual cost 1,13,39,112
(ii) Cost per km. run
Total annual cost of vehicles

Cost per kilometer run =  Refer to Working Note 1 
Total kilo metre travelled annually

` 1,13,39,112
= ` 26.89
4,21,632 kms
(iii) Freight rate per tonne km (to yield a profit of 30% on freight)
Total annual cost of three vehicles

Cost per tonne km. = Refer to Working Note 1 
Total effective tonnes kms. per annum
` 1,13,39,112
= = ` 7.04
16,10,496 kms
 ` 7.04 
= Freight rate per tonne km.   × 1 = ` 10.06
 0.7 
Working Notes:
1. Total kilometre travelled and tonnes kilometre (load carried) by four trucks in one year
Truck One way No. of Total distance Load carried Total
number distance trips covered in km per trip / day effective
in kms per day in tonnes tonnes km
1 48 4 384 6 1,152
2 120 1 240 9 1,080
3 90 2 360 8 1,440
4 60 4 480 8 1,920
Total 1,464 5,592
Total kilometre travelled by four trucks in one year
(1,464 km. × 24 days × 12 months) = 4,21,632
Total effective tonnes kilometre of load carried by four trucks during one year
(5,592 tonnes km. × 24 days × 12 months) = 16,10,496
2. Fixed and variable component of maintenance cost:
Difference in maintenance cost

Variable maintenance cost per km =
Difference in distance travelled
` 1,38,150 - ` 1,35,525
=
1,60,200 kms -1,56,700 kms
= ` 0.75
Fixed maintenance cost = Total maintenance cost–Variable maintenance cost
= ` 1,38,150 – 1,60,200 kms × ` 0.75 = ` 18,000
Q-3 A company runs a holiday home. For this purpose, it has hired a building at a rent of `10,00,000 per
month alongwith 5% of total taking. It has three types of suites for its customers, viz., single room,
double rooms and triple rooms.

Following information is given:

Type of suite Number Occupancy percentage
Single room 100 100%
Double rooms 50 80%
Triple rooms 30 60%
The rent of double rooms suite is to be fixed at 2.5 times of the single room suite and that of triple
rooms suite as twice of the double rooms suite.
The other expenses for the year 20X9 are as follows:
(` )
Staff salaries 14,25,00,000
Room attendants’ wages 4,50,00,000
Lighting, heating and power 2,15,00,000
Repairs and renovation 1,23,50,000
Laundry charges 80,50,000
Interior decoration 74,00,000
Sundries 1,53,00,000
Provide profit @ 20% on total taking and assume 360 days in a year.
You are required to Calculate the rent to be charged for each type of suite.
Ans.
(i) Total equivalent single room suites
Nature of suite Occupancy Equivalent single room suites
(Room-days) (Room-days)
Single room suites 36,000 36,000
(100 rooms x 360 days x 100%) (36,000 x 1)
Double rooms suites 14,400 36,000
(50 rooms x 360 days x 80%) (14,400 x 2.5)
Triple rooms suites 6,480 32,400
(30 rooms x 360 days x 60%) (6,480 x 5)
1,04,400
(ii) Statement of total cost:
(` )
Staff salaries 14,25,00,000
Room attendant’s wages 4,50,00,000
Lighting, heating and power 2,15,00,000
Repairs and renovation 1,23,50,000
Laundry charges 80,50,000
Interior decoration 74,00,000
Sundries 1,53,00,000
25,21,00,000

Building rent {(`10,00,000 x 12 months) + 5% 1,20,00,000+ 5% on total takings

on total taking}
Total cost 26,41,00,000 + 5% on total takings
Profit is 20% of total takings
 Total takings = ` 26,41,00,000 + 25% (5% +20%) of total takings
Let x be rent for single room suite
Then 1,04,400 x = 26,41,00,000 + 0.25 × 1,04,400 x
Or, 1,04,400 x = 26,41,00,000 + 26,100 x
Or, 78,300 x = 26,41,00,000
Or, x = 3,373
(iii) Rent to be charged for single room suite = ` 3,373
Rent for double rooms suites ` 3,373 x 2.5 = ` 8,432.5
Rent for triple rooms suites ` 3,373 x 5 = ` 16,865.
Q-4 Sanziet Lifecare Ltd. operates in life insurance business. Last year it has launched a new term insurance
policy for practicing professionals ‘Professionals Protection Plus’. The company has incurred the
following expenditures during the last year for the policy:
Policy development cost `11,25,000
Cost of marketing of the policy `45,20,000
Sales support expenses `11,45,000
Policy issuance cost `10,05,900
Policy servicing cost `35,20,700
Claims management cost `1,25,600
IT cost `74,32,000
Postage and logistics `10,25,000
Facilities cost `15,24,000
Employees cost ` 5,60,000
Office administration cost `16,20,400
Number of policy sold- 528
Total insured value of policies- `1,320 crore
Required:
(i) Calculate total cost for Professionals Protection Plus’ policy segregating the costs into four main activities
namely (a) Marketing and Sales support, (b) Operations, (c) IT and (d) Support functions.
(ii) Calculate cost per policy.
(iii) Calculate cost per rupee of insured value.

Ans.
(i) Calculation of total cost for ‘Professionals Protect Plus’ policy
1. Marketing and Sales support:
- Policy development cost 11,25,000
- Cost of marketing 45,20,000
- Sales support expenses 11,45,000 67,90,000
2. Operations:
- Policy issuance cost 10,05,900
- Policy servicing cost 35,20,700
- Claims management cost 1,25,600 46,52,200
3. IT Cost 74,32,000
4. Support functions
- Postage and logistics 10,25,000
- Facilities cost 15,24,000
- Employees cost 5,60,000
- Office administration cost 16,20,400 47,29,400
Total cost ` 2,36,03,600
(ii) Calculation of cost per policy = = = `44,703.79
No. of policies 528
Total cost ` 2,36 crore

(iii) Cost per rupee of insured value = = ` 0.0018
Total insured value ` 1,320 crore
Q-5 AD Higher Secondary School (AHSS) offers courses for 11th & 12th standard in three streams i.e. Arts,
Commerce and Science. AHSS runs higher secondary classes along with primary and secondary classes
but for accounting purpose it treats higher secondary as a separate responsibility centre. The Managing
committee of the school wants to revise its fee structure for higher secondary students. The accountant
of the school has provided the following details for a year:
Amount (`)
Teachers’ salary (15 teachers × `35,000 × 12 months) 63,00,000
Principal’s salary 14,40,000
Lab attendants’ salary (2 attendants × `15,000 × 12 months) 3,60,000
Salary to library staff 1,44,000
Salary to peons (4 peons × `10,000 × 12 months) 4,80,000
Salary to other staffs 4,80,000
Examinations expenditure 10,80,000
Office & Administration cost 15,20,000
Annual day expenses 4,50,000
Sports expenses 1,20,000

Other information:
(i)
Standard 11 & 12 Primary
Arts Commerce Science & Secondary
No. of students 120 360 180 840
Lab classes in a year 0 0 144 156
No. of examinations in a year 2 2 2 2
Time spent at library per student per year 180 hours 120 hours 240 hours 60 hours
Time spent by principal for administration 208 hours 312 hours 480 hours 1,400 hours
Teachers for 11 & 12 standard 4 5 6 -
(ii) One teacher who teaches economics for Arts stream students also teaches commerce stream students.
The teacher takes 1,040 classes in a year, it includes 208 classes for commerce students.
(iii) There is another teacher who teaches mathematics for Science stream students also teaches business
mathematics to commerce stream students. She takes 1,100 classes a year, it includes 160 classes for
commerce students.
(iv) One peon is fully dedicated for higher secondary section. Other peons dedicate their 15% time for
higher secondary section.
(v) All school students irrespective of section and age participates in annual functions and sports activities.
Required:
(i) CALCULATE cost per student per annum for all three streams.
(ii) If the management decides to take uniform fee of ` 1,000 per month from all higher secondary students,
CALCULATE stream wise profitability.
(iii) If management decides to take 10% profit on cost, COMPUTE fee to be charged from the students of all
three streams respectively.
Ans. Calculation of Cost per annum
Particulars Arts (`) Commerce Science Total (`)
(` ) (` )
Teachers’ salary (W.N-1) 16,80,000 21,00,000 25,20,000 63,00,000
R-apportionment of Economics (84,000) 1,45,091 (61,091) -
& Mathematics teachers’ salary
(W.N- 2)
Principal’s salary (W.N-3) 1,24,800 1,87,200 2,88,000 6,00,000
Lab assistants’ salary (W.N-4) - - 1,72,800 1,72,800
Salary to library staff (W.N-5) 43,200 28,800 57,600 1,29,600
Salary to peons (W.N-6) 31,636 94,909 47,455 1,74,000
Salary to other staffs (W.N-7) 38,400 1,15,200 57,600 2,11,200
Examination expenses (W.N- 8) 86,400 2,59,200 1,29,600 4,75,200
Office & Administration
expenses (W.N- 7) 1,21,600 3,64,800 1,82,400 6,68,800
Annual Day expenses (W.N-7) 36,000 1,08,000 54,000 1,98,000
Sports expenses (W.N- 7) 9,600 28,800 14,400 52,800

(i) Calculation of cost per student per annum

No. of students 120 360 180 660
Cost per student per annum 17,397 9,533 19,238 13,610
(ii) Calculation of profitability
Particulars Arts Commerce Science Total
(` ) (` ) (` ) (` )
Total Fees per annum 12,000 12,000 12,000
Profit/ (Loss) per student (5,397) 2,467 (7,238)
per annum
No. of students 120 360 180
Total Profit/ (Loss) (6,47,640) 8,88,120 (13,02,840) (10,62,360)
(iii) Computation of fees to be charged to earn a 10% profit on cost
Particulars Arts (`) Commerce (`) Science (`)
Add: Profit @10% 1,740 953 1,924
Fees per annum 19,137 10,486 21,162
Fees per month 1,595 874 1,764
Working Notes:
(1) Teachers’ salary
Particulars Arts Commerce Science
No. of teachers 4 5 6
Salary per annum (`) 4,20,000 4,20,000 4,20,000
Total salary 16,80,000 21,00,000 25,20,000
(2) Re-apportionment of Economics and Mathematics teachers’ salary
Economics Mathematics
Particulars Arts Commerce Science Commerce
No. of classes 832 208 940 160
Salary re-apportionment (`) (84,000) 84,000 (61,091) 61,091
 ` 4,20,000   ` 4,20,000 
 1,040  208   1,040  160 
   
(3) Principal’s salary has been apportioned on the basis of time spent by him for administration of classes.
(4) Lab attendants’ salary has been apportioned on the basis of lab classes attended by the students.
(5) Salary of library staffs are apportioned on the basis of time spent by the students in library.
(6) Salary of Peons are apportioned on the basis of number of students. The peons’ salary allocable to
higher secondary classes is calculated as below:

Amount (`)
Peon dedicated for higher secondary 1,20,000
(1 peon × `10,000 × 12 months)
Add: 15% of other peons’ salary 54,000
{15% of (3 peons × `10,000 × 12 months)} 1,74,000
(7) Salary to other staffs, office & administration cost, Annual day expenses and sports expenses are
apportioned on the basis of number of students.
(8) Examination Expenses has been apportion taking number of students and number examinations into
account.
Q-6 A hotel is being run in a Hill station with 200 single rooms. The hotel offers concessional rates during six
off-season months in a year. During this period, half of the full room rent is charged. The management’s
profit margin is targeted at 20% of the room rent. The following are the cost estimates and other details
for the year ending 31stMarch,2019:
(i) Occupancy during the season is 80% while in the off-season it is 40%.
(ii) Total investment in the hotel is ` 300 lakhs of which 80% relates to Buildings and the balance to
Furniture and other Equipment.
(iii) Room attendants are paid ` 15 per room per day on the basis of occupancy of rooms in a month.
(iv) Expenses:
• Staff salary (excluding that of room attendants) ` 8,00,000
• Repairs to Buildings ` 3,00,000
• Laundry Charges ` 1,40,000
• Interior Charges ` 2,50,000
• Miscellaneous Expenses ` 2,00,200
(v) Annual Depreciation is to be provided on Buildings @ 5% and 15% on Furniture and other
Equipments on straight line method.
(vi) Monthly lighting charges are ` 110, except in four months in % winter when it is ` 30 per room and
this cost is on the basis of full occupancy for a month.
You are required to workout the room rent chargeable per day both during the season and the off-
season months using the foregoing information.
(Assume a month to be of 30days and winter season to be considered as part of off-season).
Ans. Working Notes:
(i) Total Room days in a year
Season Occupancy (Room-days) Equivalent Full Room charge days
Season – 80% Occupancy 200 Rooms × 80% × 6 28,800 Room Days × 100%
months × 30 days in a = 28,800
month = 28,800 Room Days
Off-season – 40% 200 Rooms × 40% × 6 14,400 Room Days × 50%
Occupancy months × 30 days in a = 7,200
month = 14,400 Room Days 36,000 Full Room days
Total Room Days 28,800 + 14,400 = 43,200
Room Days

(ii) Lighting Charges:

It is given in the question that lighting charges for 8 months is `110 per month and during winter season
of 4 months it is `30 per month. Further it is also given that peak season is 6 months and off season is
6 months.
It should be noted that – being Hill station, winter season is to be considered as part of Off season.
Hence, the non-winter season of 8 months include – Peak season of 6 months and Off season of 2
months.
Accordingly, the lighting charges are calculated as follows:
Season Occupancy (Room-days)
Season & Non-winter – 80% Occupancy 200 Rooms × 80% × 6 months × ` 110 per
month = ` 1,05,600
Off- season & Non-winter – 200 Rooms × 40% × 2 months × `110 per
40% Occupancy (8 – 6 months) month = ` 17,600
Off- season & -winter – 40% 200 Rooms × 40% × 4 months × ` 30 per
Occupancy months) month = ` 9,600
Total Lighting charges ` 1,05,600+ ` 17,600 + ` 9,600 = ` 132,800
Statement of total cost: (` )
Staff salary 8,00,000
Repairs to building 3,00,000
Laundry 1,40,000
Interior 2,50,000
Miscellaneous Expenses 2,00,200
Depreciation on Building (` 300 Lakhs × 80% × 5%) 12,00,000
Depreciation on Furniture & Equipment (` 300 Lakhs × 20% × 15%) 9,00,000
Room attendant’s wages (` 15 per Room Day for 43,200 Room Days) 6,48,000
Lighting charges 1,32,800
Total cost 45,71,000
Add: Profit Margin (20% on Room rent or 25% on Cost) 11,42,750
Total Rent to be charged 57,13,750
Calculation of Room Rent per day:
Total Rent / Equivalent Full Room days = ` 57,13,750/ 36,000 = ` 158.72
Room Rent during Season – ` 158.72
Room Rent during Off season = ` 158.72 × 50% = ` 79.36
Q-7 Describe Composite Cost unit as used in Service Costing and discuss the ways of computing it.
Ans. Composite Cost Unit: Sometime two measurement units are combined together to know the cost of
service or operation. These are called composite cost units. For example, a public transportation
undertaking would measure the operating cost per passenger per kilometre.
Examples of Composite units are Ton- km., Quintal- km, Passenger-km., Patient-day etc. Composite
unit may be computed in two ways:
(i) Absolute (Weighted Average) basis.
(ii) Commercial (Simple Average) basis.
In both bases of computation of service cost unit, weightage is also given to qualitative factors
rather quantitative (which are directly related with variable cost elements) factors alone.

(i) Weighted Average or Absolute basis – It is summation of the products of qualitative and
quantitative factors. For example, to calculate absolute Ton-Km for a goods transport is
calculated as follows.:
 (Weight Carried × Distance)1 + (Weight Carried × Distance)2 + ..... + (Weight Carried × Distance)n
Similarly, in case of Cinema theatres, price for various classes of seats are fixed differently.
For example–
First class seat may be provided with higher quality service and hence charged at a higher
rate, whereas Second Class seat may be priced less. In this case, appropriate weight to be
given effect for First Class seat and Second Class seat – to ensure proper cost per composite
unit.
(ii) Simple Average or Commercial basis – It is the product of average qualitative and total
quantitative factors. For example, in case of goods transport, Commercial Ton-Km is arrived
at by multiplying total distance km., by average load quantitTy.
 w + W2 +.......Wn 
 (Distance1 + Distance2 + .......... & + Distancen ) ×  1 
 n 
In both the example, variable cost is dependent of distance and is a quantitative factor.
Since, the weight carried does not affect the variable cost hence and is a qualitative factor.
Q-8 X Ltd. distributes’ its goods to a regional dealer using single lorry. The dealer premises are 40 kms away
by road. The capacity of the lorry is 10 tonnes. The lorry makes the journey twice a day fully loaded on
the outward journey and empty on return journey. The following information is available:
Diesel Consumption 8 km per litre
Diesel Cost ` 60 per litre
Engine Oil ` 200 per week
Driver’s Wages (fixed) ` 2,500 per week
Repairs ` 600 per week
Garage Rent ` 800 per week
Cost of Lorry (excluding cost of tyres) ` 9,50,000
Life of Lorry 1,60,000 kms
Insurance ` 18,200 per annum
Cost of Tyres ` 52,500
Life of Tyres 25,000 kms
Estimated sale value of the lorry at end of its life is ` 1,50,000
Vehicle License Cost ` 7,800 per annum
Other Overhead Cost ` 41,600 per annum
The lorry operates on a 5 day week.
Required :
(i) A statement to show the total cost of operating the vehicle for the four week period analysed into
Running cost and Fixed cost.
(ii) Calculate the vehicle operating cost per km and per tonne km. (Assume 52 weeks in a year)

Ans. Working Notes:

Particulars For 4 weeks For 1 week
(by dividing by 4)
Total distance travelled (40 k.m × 2 × 2 trips
× 5 days × 4 weeks) 3,200 km 800 km
Total tonne km (40 k.m × 10 tonnes × 2 × 5 days
× 4 weeks) 16,000 tonne km 4,000 tonne km
(i) Statement showing Operating Cost
Amount (`)
Particulars For 4 weeks For 1 week
(by dividing by 4)
A. Fixed Charges:
Drivers’ wages (` 2,500 x 4 weeks) 10,000 2,500
Garage rent (` 800 × 4 weeks) 3,200 800
Insurance {(`18,200 ÷ 52 weeks) × 4 weeks} 1,400 350
Vehicle license {(`7,800 ÷ 52 weeks) × 4 weeks} 600 150
Other overheads cost {(` 41,600 ÷ 52 weeks) × 4 weeks} 3,200 800
Total (A) 18,400 4,600
B. Running Cost:
Cost of diesel {(3,200 ÷ 8 kms) × ` 60} 24,000 6,000
Engine Oil (`200 × 4 weeks)* 800 200
Repairs (`600 × 4 weeks)* 2,400 600
Depreciation on vehicle 16,000 4,000
 ` 9,50,000 -` 1,50,000 
  3,200km 
 1,60,000 km 
 ` 52,500 
Depreciation on tyres   3,200km  6,720 1,680
 25,000km 
Total (B) 49,920 12,480
C. Total Cost (A + B) 68,320 17,080
*Cost of engine oil & repairs may also be treated as fixed cost, as the question relates these with time
i.e. in weeks instead of running of vehicle.
(ii) Calculation of vehicle operating cost :
Operating cost per k.m. = ` 68,320 or ` 17,080 = ` 21.35
3,200 kms 800 Kms
Operating cost per Tonne-k.m. = ` 68,320 or ` 17,080 = ` 4.27
16,000 4,000

Q-9 M/s XY Travels has been given a 25 km. long route to run an air- conditioned Mini Bus.
The cost of bus is ` 20,00,000. It has been insured @3% premium per annum while annual road tax
amounts to ` 36,000. Annual repairs will be ` 50,000 and the bus is likely to last for 5 years. The driver's
salary will be `2,40,000 per annum and the conductor's salary will be ` 1,80,000 per annum in addition
to 10% of the takings as commission (to be shared by the driver and the conductor equally). Office and
administration overheads will be ` 18,000 per annum. Diesel and oil will be ` 1,500 per 100 km. The bus
will make 4 round trips carrying on an average 40 passengers on each trip.
Assuming 25% profit on takings and considering that the bus will run on an average 25 days in a month,
you are required to:
(i) prepare operating cost sheet (for the month).
(ii) calculate fare to be charged per passenger km.
Ans.
(i) Statement showing the Operating Cost per Passenger-km.
Yearly (`) Monthly (`)
(A) Standing Charges:
Insurance Charge ` 20,00,000 × 3% 60,000 5,000
Road Tax 36,000 3,000
Depreciation (20,00,000/5) 4,00,000 33,333.33
Total 4,96,000 41,333.33
(B) Maintenance Charges:
Annual Repairs 50,000 4166.67
Office and administration overheads 3,18,000 26,500
Total 3,68,000 30666.67
(C) Running Cost/Charges:
Driver’s Salary 2,40,000 20,000
Conductor’s Salary 1,80,000 15,000
 1,500 
Diesel & Oil  60,000   9,00,000 75,000
 100 
Total 13,20,000 41,333.33
Total (A+B+C) Cost before commission and profit 21,84,000 1,82,000
Commission (33,60,000 × 10%) (working note 2) 3,36,000 28,000
Profit (33,60,000 × 25% ) (working note 2) 8,40,000 70,000
Takings (working note 1) 33,60,000 2,80,000
Total Collection / Takings
(ii) Fare per Passenger-km. =
Total Passenger - km (Working note 3)
33,60,000
= ` 1.40
24,00,000
OR

2,80,000
Fare per Passenger-km. (monthly) = = ` 1.40
2,00,000
Working note :
1. Cost before commission (10%) and profit (25%) is 21,84,000 which is 65% of total takings. So total
takings is (21,84000÷65) ×100 = ` 33,60,000
2. Commission is 10% of ` 33,60,000 = ` 3,36,000 and Profit is 25% of ` 33,60,000= ` 8,40,000
3. Total Km is (4 Round Trips × Days in a month × Month = (4×2×25 ×25×12 ) = 60,000 km
Passenger km is 60,000 km×40 passenger= 24,00,000.
Q-10 A group of ‘Health Care Services’ has decided to establish a Critical Care Unit in a metro city with an
investment of ` 85 lakhs in hospital equipments. The unit’s capacity shall be of 50 beds and 10 more
beds, if required, can be added. Other information for a year are as under:
(`)
Building Rent 2,25,000 per month
Manager Salary (Number of Manager-03) 50,000 per month to each one
Nurses Salary (Number of Nurses-24) 18,000 per month to each Nurse
Ward boy’s Salary (Number of ward boys’ -24) 9,000 per month per person
Doctor’s payment (Paid on the basis of number 5,50,000 per month
of patients attended and time spent by them)
Food and laundry services (variable) 39,53,000
Medicines to patients (variable) 22,75,000 per year
Administrative Overheads 28,00,000 per year
Depreciation on equipments 15% per annum on original cost
It was reported that for 200 days in a year 50 beds were occupied, for 105 days 30 beds were occupied
and for 60 days 20 beds were occupied.
The hospital hired 250 beds at a charge of ` 950 per bed to accommodate the flow of patients. However,
this never exceeded the normal capacity of 50 beds on any day. Find out: (i) Profit per patient day, if
hospital charges on an average ` 2,500 per day from each patient. (ii) Break even point per patient day
(Make calculation on annual basis)
Ans Number of Patient Days = (200x50) + (105x30) + (60x20)
=14,350 patient days + 250 = 14,600
Statement Showing Profit
Elements of Cost and Revenue Total (`)
A. Revenue (14,600 x ` 2,500) 3,65,00,000
B. Variable Costs
Food and Laundry Service 39,53,000
Medicines to Patients 22,75,000
Doctor’s Payment 66,00,000
Hire Charges of Bed (250 x ` 950) 2,37,500
Total Variable Cost 1,30,65,500
C. Fixed Costs
Building Rent 27,00,000
Manager’s Salary (` 50,000 x 3 x 12) 18,00,000

Nurse’s Salary (` 18,000 x 12 x 24) 51,84,000

Ward boy’s Salary (` 9,000 x 12 x 24) 25,92,000
Administrative Overheads 28,00,000
Depreciation on Equipment’s 12,75,000
1,63,51,000
D. Total Cost (B+C) 2,94,16,500
E. Profit (A-D) 70,83,500
Profit per patient day = ` 70,83,500/14,600 = ` 485.17
(i) Contribution (per patient day) = (` 3,65,00,000 – ` 1,30,65,500)/ 14,600 = ` 1,605.10
BEP = 1,63,51,000/1,605.10 = 10,186.90 or say 10,187 patient days
Notes:
1. Higher Charges for extra beds are a semi variable cost; still, for the sake of convenience it has been
considered a variable cost.
2. Assumed, the hospital hired 250 beds at a charge of ` 950 per bed to accommodate the flow of patients.
However, this never exceeded the 10 beds above the normal capacity of 50 beds on any day.
3. The fees were paid based on the number of patients attended to and the time spent by them, which on
an average worked out to ` 5,50,000 p.m.
Q-11 A transport company has a fleet of three trucks of 10 tonnes capacity each plying in different directions
for transport of customer's goods. The trucks run loaded with goods and return empty.
The distance travelled, number of trips made and the load carried per day by each truck are as under:
Truck No. One way No. of trips Load carried
Distance Km per day per trip / day tonnes
1 16 4 6
2 40 2 9
3 30 3 12
The analysis of maintenance cost and the total distance travelled during the last two years is as under
Year Total distance travelled Maintenance Cost (Rs.)
1 1,60,200 46,050
2 1,56,700 45,175
The following are the details of expenses for the year under review:
Diesel Rs. 65 per litre. Each litre gives 4 km per litre of diesel on an average.
Driver's salary Rs. 24,000 per month
Licence and taxes Rs. 25,000 per annum per truck
Insurance Rs. 45,000 per annum for all the three vehicles
Purchase Price per truck Rs. 30,00,000, Life 10 years. Scrap value at the end
of life is Rs. 1,00,000.
Oil and sundries Rs. 250 per 100 km run.
General Overhead Rs. 1,15,600 per annum
The vehicles operate 24 days per month on an average.
On the basis of commercial tone-km, you are required to:
(i) PREPARE an Annual Cost Statement covering the fleet of three vehicles.
(ii) CALCULAT E the cost per km. run.
(iii) DET ERMINE the freight rate pe r tonne km. to yield a profi t of 10% on freight.

Ans. (i) Annual Cost Statement of three vehicles

( Rs.)
Diesel {(1,34,784 km . ÷ 4 km) × Rs. 65) (Refer to Working Note 1) 21,90,240
Oil & sundries {( 1,34,784 km . ÷ 100 km.) × Rs. 250} 3,36,960
Maintenance {(1,34,784 km . × Rs. 0.25) + Rs. 6,000}
(Refer to Working Note 2) 39,696
Drivers' salary {(Rs.24,000 × 12 months) × 3 trucks} 8,64,000
Licence and taxes ( Rs. 25,000 × 3 trucks) 75,000
Insurance 45,000
Depreciation {(Rs. 29,00,000 ÷ 10 years) × 3 trucks} 8, 70,000
General overhead 1,15,600
Total annual cost 45,36,496
(ii) Cost per km. run
Cost per kilometer run = Total annual cos t of vehicles (Refer to Working Note 1)
Total kilometre travelled annually
Rs.45,36,496
= Rs. 33.66
1,34,784 Kms
(iii) Freight rate per tonne km (to yield a profit of 10% on freight)
Cost per tonne km.= Total annual cos t of three vehicles (Refer to Working Note 1)
Total effective tonnes kms. per annum
Rs.45, 36, 496
= Rs.7.48
6, 06, 528 kms
 Rs.7.48 
Freight rate per tonne km.   x 1 = Rs. 8.31
 0.9 
Working Notes:
1. Total kilometer travelled and Commercial tonnes kilometer (load carried) by three trucks in one year
Truck One way No. of Total Total Load Total
distance in kms trips distance distance carried effective
covered in covered in per trip / tonnes km
km per day km per day day in
(with load) (up & down) tonnes
a b c=a ×b d=c× 2 e f = 27/3 × c
1 16 4 64 128 6 576
2 40 2 80 160 9 720
3 30 3 90 180 12 810
Total 234 468 27 2,106
Total kilometre travelled by three trucks in one year
(468 km . × 24 days × 12 months) = 1,34,784
Total effective tonnes kilometre of load carri ed by three trucks during one year

(2,106 tonnes km . × 24 days × 12 months) = 6,06,528 tonne-km

2. Fixed and variable component of maintenance cost:
Variable maintenance cost per km . = Difference in maintenanc e cost
Difference in distance travelled
= Rs. 46,050 – Rs. 45,175 = Rs. 0.25
1,60,200 kms – 1,56,700 kms
Fixed maintenance cost =T otal maintenance cost–Variable maintenance cost
= Rs. 46,050 – 1,60,200 kms × Rs. 0.25= Rs. 6,000.
Q-12 ‘RP’ Resorts (P) Ltd. offers three types of rooms to its guests, viz deluxe room, super deluxe room and
luxury suite. You are required to COMPUTE the tariff to be charged to the customers for different types
of rooms on the basis of following information:
Types of Room Number of Rooms Occupancy
Deluxe Room 100 90%
Super Deluxe Room 60 75%
Luxury Suite 40 60%
Rent of ‘super deluxe’ room is to be fixed at 2 times of ‘deluxe room’ and that of ‘luxury suite’ is 3 times
of ‘deluxe room’. Annual expenses are as follows:
Particulars Amount (` lakhs)
Staff salaries 680.00
Lighting, Heating and Power 300.00
Repairs, Maintenance and Renovation 180.00
Linen 30.00
Laundry charges 24.00
Interior decoration 75.00
Sundries 30.28
An attendant for each room was provided when the room was occupied and he was paid ` 500 per day
towards wages. Further, depreciation is to be provided on building @ 5% on ` 900 lakhs, furniture and
fixtures @ 10% on ` 90 lakhs and air conditioners @ 10% on ` 75 lakhs.
Profit is to be provided @ 25% on total taking and assume 360 days in a year.
Ans. Operating cost statement of ‘RP’ Resort (P) Limited
Particulars Cost per annum
(` in lakhs)
Staff Salaries 680.00
Room Attendant’s Wages (refer W.N-3) 286.20
Lighting, Heating & Power 300.00
Repairs, Maintenance & Renovation 180.00
Linen 30.00
Laundry charges 24.00
Interior Decoration 75.00

Sundries 30.28
Depreciation (refer W.N- 4):
- Building 45.00
- Furniture & Fixture 9.00
- Air Conditioners 7.50
Total cost for the year 1,666.98
Computation of profit:
Let ` x be the rent for deluxe from.
Equivalent deluxe room days are 90,720 (refer W.N- 2)
Total takings = ` 90,720x
Profit is 25% of total takings.
Profit = 25% of ` 90,720x = ` 22,680x
Total takings = Total Cost + Profit
` 90,720x = ` 16,66,98,000 + ` 22,680x
` 90,720x - ` 22,680x = ` 16,66,98,000
` 68,040x = ` 16,66,98,000
` 116,66,98,000
X= ` 68,040 = 2,450
Rent to be charged for Deluxe room ` 2,450

Rent to be charged for Super deluxe room =
Rent of deluxe room × 2 = ` 2,450 × 2 ` 4,900
Rent to be charged for Luxury suite =
Rent of Super Deluxe room × 1.5 = ` 4,900 × 1.5 ` 7,350
Working Notes:
1. Computation of Room Occupancy
Type of Room No. of rooms x no. of days x occupancy % Room days
Deluxe Room 100 rooms x 360 days x 90% occupancy 32,400
Super Deluxe Room 60 rooms x 360 days x 75% occupancy 16,200
Luxury Suite 40 x 360 days x 60% occupancy 8,640
Total 57,240
2. Computation of equivalent deluxe room days :
Rent of ‘super deluxe’ room is to be fixed at 2 times of ‘deluxe room’ and luxury suite’ is 3 times of
‘deluxe room’. Therefore equivalent room days would be:
Type of Room Room days Equivalent deluxe room days
Deluxe Room 32,400 x 1 32,400
Super Deluxe Room 16,200 x 2 32,400
Luxury Suite 8,640 x 3 25,920
Total 90,720

3. Computation of room attendant’s wages :

Room occupancy days × ` 500 per day
= 57,240 days × ` 500 = ` 286.20 lakhs
4. Computation of Depreciation per annum:
Particulars Cost (`) Rate of Depreciation (`)
Depreciation
Building 900,00,000 5% 45,00,000
Furniture & Fixtures 90,00,000 10% 9,00,000
Air Conditioners 75,00,000 10% 7,50,000
Q-13 Calculate a suggested fare per passenger-km from the following information for a Mini Bus:
(i) Length of route: 30 km
(ii) Purchase price Rs. 4,00,000
(iii) Part of above cost met by loan, annual interest of which is Rs. 10,000 p.a.
(iv) Other annual charges: Insurance Rs. 15,000, Garage rent Rs. 9,000, Road tax Rs. 3,000, Repairs &
maintenance Rs. 15,000, Administrative charges Rs. 5,000.
(v) Running Expenses: Driver & Conductor Rs. 5,000 p.m., Repairs/Replacement of tyre-tube Rs. 3,600
p.a., Diesel and oil cost per km Rs. 5.
(vi) Effective life of vehicle is estimated at 5 years at the end of which it will have a scrap value of Rs.
10,000.
(vii) Mini Bus has 20 seats and is planned to make Six no. two way trips for 25 days/p.m.
(viii) Provide profit @ 20% of total revenue.
Ans. Working Notes:
1. Depreciation per annum: = Purchase price - Scrap value
Estimated life
Rs. 4, 00, 000 - Rs. 10, 000
= = Rs. 78,000
5 years
2. Total distance travelled by mini-bus in 25 days:
= Length of the route (two -sides) × No. of trips per day × No. of days
= 60km × 6 trips × 25 days = 9,000 km
3. Total Passenger-Km:
= Total distance travelled by mini-bus in 25 days × No. of seats
= 9,000 km × 20 seats = 1,80,000 passenger-km
Statement suggesting fare per passenger-km
Particulars Cost per annum Cost per month
Rs. Rs.
Fixed expenses:
Insurance 15,000
Garage rent 9,000
Road tax 3,000
Administrative charges 5,000
Depreciation 78,000
Interest on loan 10,000 ______
1,20,000 10,000

Running expenses:
Repair and maintenance 15,000 1,250
Replacement of tyre-tube 3,600 300
Diesel and oil cost (9,000 km × Rs. 5) - 45,000
Driver and conductor’s salary - 5,000
Total cost (per month) 61,550.00
Add: Profit 20% of total revenue cost or 25% of total cost 15,387.50
Total revenue 76,937.50
Rate per passenger-km Rs. 76,937.50/1,80,000 passenger km = 0.42743 i.e., = 0.43 i.e., 43 paise.
Q-14 SLS Infrastructure builts and operates a 110 k.m. long highway on the basis of Built-Operate-Transfer
(BOT) model for a period of 25 years. A traffic assessment has been carried out to estimate the traffic
flow per day. The details are as below:
Sl. No. Type of vehicle Daily traffic volume
1. Two wheelers 44,500
2. Car and SUVs 3,450
3. Bus and LCV 1,800
4. Heavy commercial vehicles 816
The following is the estimated cost of the project:
Sl. no. Activities Amount (Rs. in lakh)
1 Site clearance 170.70
2 Land development and filling work 9,080.35
3 Sub base and base courses 10,260.70
4 Bituminous work 35,070.80
5 Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc. 29,055.60
6 Drainage and protection work 9,040.50
7 Traffic sign, marking and road appurtenance 8,405.00
8 Maintenance, repairing and rehabilitation 12,429.60
9 Environmental management 982.00
Total Project cost 1,14,495.25
An average cost of Rs.1,120 lakh has to be incurred on administration and toll plaza operation.
On the basis of the vehicle specifications (i.e. weight, size, time saving etc.), the following weights has
been assigned to the passing vehicles:
Sl. No. Type of vehicle
1. Two wheelers 5%
2. Car and SUVs 20%
3. Bus and LCV 30%
4. Heavy commercial vehicles 45%
Required:
(i) Calculate the total project cost per day of concession period.
(ii) Compute toll fee to be charged for per vehicle of each type, if the company wants to earn a profit
of 15% on total cost.
[Note: Concession period is a period for which an infrastructure is allowed to operate and recovers its
investment]

Ans.(a) (i) Calculation of total project cost per day of concession period:
Activities Amount (Rs. in lakh)
Site clearance 170.70
Land development and filling work 9,080.35
Sub base and base courses 10,260.70
Bituminous work 35,070.80
Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc 29,055.60
Drainage and protection work 9,040.50
Traffic sign, marking and road appurtenance 8,405.00
Maintenance, repairing and rehabilitation 12,429.60
Environmental management 982.00
Administration and toll plaza operation cost 1,120.00
Total Cost 1,15,615.25
Concession period in days (25 years × 365 days) 9,125
Cost per day of concession period (Rs. in lakh) 12.67
(ii) Computation of toll fee:
Cost to be recovered per day = Cost per day of concession period + 15% profit on cost
= Rs.12,67,000 + Rs.1,90,050 = Rs.14,57,050
` 14,57,050
Cost per equivalent vehicle = 76,444 units Refer working note 
= Rs.19.06 per equivalent vehicle

Vehicle type-wise toll fee:
Sl. No. Type of vehicle Equivalent cost [A] Weight [B] Toll fee per vehicle [A×B]
1. Two wheelers Rs.19.06 1 19.06
2. Car and SUVs Rs.19.06 4 76.24
3. Bus and LCV Rs.19.06 6 114.36
4. Heavy commercial vehicles Rs.19.06 9 171.54
Working Note:
The cost per day has to be recovered from the daily traffic. The each type of vehicle is to be converted
into equivalent unit. Let’s convert all vehicle types equivalent to Two-wheelers.
Sl. No. Type of vehicle Daily traffic Weight Ratio [B] Equivalent Two-
volume [A] wheeler
1. Two wheelers 44,500 0.05 1 44,500
2. Car and SUVs 3,450 0.20 4 13,800
3. Bus and LCV 1,800 0.30 6 10,800
4. Heavy commercial vehicles 816 0.45 9 7,344
Total 76,444

Q-15 DKG Airlines owns single passenger aircraft and operates between Melbourne and Delhi only. Flight
leaves Melbourne on Monday and Thursday and departs from Delhi on Wednesday and Saturday. DKG
Airlines cannot afford any more flight between Melbourne and Delhi. Only economical class seats are
available on its flight and all tickets are booked by travel agents. The following information are collected.
Seating capacity per plane 360
Average passengers per flight 250
Flights per week 4
Flights per year 208
Average one-way fare Rs.50,000
Variable fuel cost Rs.28,00,000 per flight
Food service to passengers (not charged to Passengers) Rs.2,600 per passenger
Commission to travel agents 15% of fare
Fixed annual lease cost allocated to each flight Rs. 15,30,000 per flight
Fixed ground services (maintenance, check in,
Baggage handling cost) allocated to each flight Rs.1,70,000 per flight
Fixed salaries of flight crew allocated to each flight Rs.6,50,000 per flight
For the sake of simplicity assume that fuel cost is unaffected by the actual number of passengers on a
flight.
Required:
(i) Calculate the operating income that DKG Airlines makes on each way flight between Melbourne
and Delhi?
(ii) The market research department of DKG Airlines indicates that lowering the average one-way
fare to Rs. 48,000 and increase in agents’ commission to 17.5% will increase the average number
of passenger per flight to 275. DECIDE whether DKG Airlines should lower its fare or not?
Ans.(i) Statement of operating income of DKG Airlines for Melbourne-Delhi flight (one way)
Particulars Amount(`) Amount(`)
Fare received (per flight): 250 passengers × ` 50,000 1,25,00,000
Variable costs (per flight):
- Fuel cost 28,00,000
- Food (250 × ` 2,600) 6,50,000
- Commission to Travel Agents (15% of ` 1,25,00,000) 18,75,000 (53,25,000)
Contribution per flight 71,75,000
Fixed cost (per flight):
Annual lease cost 15,30,000
Fixed ground service costs 1,70,000
Salaries of flight crew 6,50,000 (23,50,000)
Operating income per flight 48,25,000
(ii) Operating income of DKG Airlines per Melbourne-Delhi flight (one way) after reduction in fare
Fare received (per flight): 275 passengers × ` 48,000 1,32,00,000
Variable costs (per flight):
Fuel cost 28,00,000
Food (275 × `2,600) 7,15,000
Commission to Travel Agents (17.5% of `1,32,00,000) 23,10,000 (58,25,000)
Contribution per flight 73,75,000

Excess contribution due to lowering of fare (` 73,75,000 – ` 71,75,000) = `2,00,000. DKG Airlines should
lower its fare as it would increase its contribution by ` 2,00,000.
Q-16 Happy Transport Service is a Delhi based national goods transport service provider, owning four trucks
for this purpose. The cost of running and maintaining these trucks are as follows:
Particulars Amount
Diesel cost Rs.13.75 per km.
Engine oil Rs.4,200 for every 13,000 km.
Repair and maintenance Rs.12,000 for every 10,000 km.
Driver’s salary Rs.18,000 per truck per month
Cleaner’s salary Rs.7,500 per truck per month
Supervision and other general expenses Rs.12,000 per month
Cost of loading of goods Rs.150 per Metric Ton (MT)
Each trucks were purchased for Rs. 20 lakhs with an estimated life of 7,20,000 km.
During the next month, it is expecting 6 bookings, the details are as follows:
Sl. No. Journey Distance in km Weight- Up (in MT) Weight- Down (in MT)
1. Delhi to Kochi 2,700 14 6
2. Delhi to Guwahati 1,890 12 0
3. Delhi to Vijayawada 1,840 15 0
4. Delhi to Varanasi 815 10 0
5. Delhi to Asansol 1,280 12 4
6. Delhi to Chennai 2,185 10 8
Total 10,710 73 18
Required
(i) Calculate the total absolute Ton-km for the vehicles.
(ii) Calculate the cost per ton-km.
Ans.
(i) Calculation of Absolute Ton-km for the next month:
Journey Distance Weight-Up Ton-km WeightDown Ton-km Total
in km (in MT) (in MT)
(a) (b) (c)=(a)×(b) (d) (e) =(a)×(d) (c) + (e)
Delhi to Kochi 2,700 14 37,800 6 16,200 54,000
Delhi to Guwahati 1,890 12 22,680 0 0 22,680
Delhi to Vijayawada 1,840 15 27,600 0 0 27,600
Delhi to Varanasi 815 10 8,150 0 0 8,150
Delhi to Asansol 1,280 12 15,360 4 5,120 20,480
Delhi to Chennai 2,185 10 21,850 8 17,480 39,330
Total 10,710 73 1,33,440 18 38,800 1,72,240
Total Ton-Km = 1,72,240 ton-km

(ii) Calculation of cost per ton-km:

A. Running cost:
- Diesel Cost {Rs.13.75 × (10,710 × 2)} 2,94,525.00
 Rs.4,200 
- Engine oil cost  × 21, 420km  6,920.31
 13, 000km 
- Cost of loading of goods {Rs.150 × (73+18)} 13,650.00
 Rs.20, 00, 000 

- Depreciation  × 21, 420km  59,500.00 3,74,595.31
 7,20, 000km 
 Rs.12, 000 
B. Repairs & Maintenance Cost  × 21, 420km  25,704
 10, 000km 
C. Standing Charges
- Drivers’ salary (Rs.18,000 × 4 trucks) 72,000
- Cleaners’ salary (Rs.7,500 × 4 trucks) 30,000
- Supervision and other general exp. 12,000 1,14,000
Total Cost (A + B + C) 5,14,299.31
Total ton-km 1,72,240
Cost per ton-km 2.99
Q-17 A transport company has 20 vehicles, the capacities are as follows:
No. of Vehicles Capacity per vehicle
5 9 MT
6 12 MT
7 15 MT
2 20 MT
The company provides the goods transport service between stations ‘A’ to station ‘B’. Distance between
these stations is 100 kilometers. Each vehicle makes one round trip per day on an average. Vehicles are
loaded with an average of 90 per cent of capacity at the time of departure from station ‘A’ to station ‘B’
and at the time of return back loaded with 70 per cent of capacity. 10 per cent of vehicles are laid up for
repairs every day. The following information is related to the month of August, 2020:
Salary of Transport Manager ` 60,000
Salary of 30 drivers `20,000 each driver
Wages of 25 Helpers `12,000 each helper
Loading and unloading charges ` 850 each trip
Consumable stores (depends on running of vehicles) ` 1,35,000
Insurance (Annual) ` 8,40,000

Road Licence (Annual) ` 6,00,000

Cost of Diesel per litre ` 78
Kilometres run per litre each vehicle 5 Km.
Lubricant, Oil etc. ` 1,15,000
Cost of replacement of Tyres, Tubes, other parts etc. (on running basis) `4,25,000
Garage rent (Annual) ` 9,00,000
Routine mechanical services ` 3,00,000
Electricity charges (for office, garage and washing station) ` 55,000
Depreciation of vehicles (on time basis) ` 6,00,000
There is a workshop attached to transport department which repairs these vehicles and other vehicles
also. 40 per cent of transport manager’s salary is debited to the workshop. The transport department
has been apportioned ‘88,000 by the workshop during the month. During the month operation was for
25 days.
You are required:
(i) CALCULATE per ton-km operating cost.
(ii) DETERMINE the freight to be charged per ton-km, if the company earned a profit of 25 per cent on
freight.
Ans.(i) Operating Cost Sheet for the month of August, 2020
A. Fixed Charges:
Manager’s salary (` 60,000 × 60%) 36,000
Drivers’ Salary (`20,000 x 30 drivers) 6,00,000
Helpers’ wages (` 12,000 x 25 helpers) 3,00,000
Insurance (` 8,40,000 ÷ 12 months) 70,000
Road licence (` 6,00,000 ÷ 12 months) 50,000
Garage rent (` 9,00,000 ÷ 12 months) 75,000
Routine mechanical services 3,00,000
Electricity charges (for office, garage and washing station) 55,000
Depreciation of vehicles 6,00,000
Apportioned workshop expenses 88,000
Total (A) 21,74,000
B. Variable Charges:
Loading and unloading charges (Working Note 1) 7,65,000
Consumable Stores 1,35,000
Cost of diesel (Working Note 2) 14,04,000

Lubricant, Oil etc. 1,15,000

Replacement of Tyres, Tubes & other parts 4,25,000
Total (B) 28,44,000
C. Total Cost (A + B) 50,18,000
D. Total Ton-Kms. (Working Note 3) 9,43,200
E. Cost per ton-km. (C ÷ D) 5.32
(ii) Calculation of Chargeable Freight
Cost per ton-km. ` 5.32
Add: Profit @ 25% on freight or 33S!% on cost ` 1.77
Chargeable freight per ton-km. ` 7.09
Working Notes:
1. Wages paid to loading and unloading labours
Numbers of vehicles available per day × No. of days × trips × wages per trip
(20 vehicles × 90%) × 25 days × 2 trips × ` 850
18 × 25 × 2 × 850 = `7,65,000
2. Cost of Diesel:
Distance covered by each vehicle during August, 2020
= 100 k.m. x 2 x 25 days „e 90% = 4,500 km.
4, 500 k.m. 20 vehicles

Consumption of diesel = = 18, 000 litres.
5 k.m.
Cost of diesel = 18,000 litres x ` 78 = `14,04,000.
3. Calculation of total ton-km:
Total Ton-Km. = Total Capacity x Distance covered by each vehicle „e Average
Capacity Utilisation ratio.
(90% + 70%)
= [(5 x 9 MT) + (6 x 12MT) + (7 x 15 MT) + (2 x 20 MT)] x 4, 500 k.m. x
2
= (45 + 72 + 105 + 40) x 4,500 k.m. x 80%
= 262 x 4,500 x 80%.
= 9,43,200 ton-km.

Q-18 MKL Infrastructure built and operates 110 k.m. highway on the basis of Built-Operate-Transfer (BOT)
for a period of 21 years. A traffic assessment has been carried out to estimate the traffic flow per day
which shows the following figures:
Sl. No. Type of vehicle Daily traffic volume
1. Two wheelers 44,500
2. Car and SUVs 3,450
3. Bus and LCV 1,800
4. Heavy commercial vehicles 816
The following is the estimated cost of the project:
Sl. no. Activities Amount
(` in lakh)
1 Site clearance 341.00
2 Land development and filling work 9,160.00
3 Sub base and base courses 10,520.00
4 Bituminous work 32,140.00
5 Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc 28,110.00
6 Drainage and protection work ,080.00
7 Traffic sign, marking and road appurtenance 8,810.00
8 Maintenance, repairing and rehabilitation 12,850.00
9 Environmental management 1,964.00
An average cost of ` 1,200 lakh has to be incurred on administration and toll plaza operation.
On the basis of the vehicle specifications (i.e. weight, size, time saving etc.), the following weights has
been assigned to the passing vehicles:
Sl. No. Type of vehicle
1. Two wheelers 5%
2. Car and SUVs 20%
3. Bus and LCV 30%
4. Heavy commercial vehicles 45%
Required:
(i) CACULATE the total project cost per day of concession period.
(ii) COMPUTE toll fee to be charged for per vehicle of each type, if the company wants earn a profit of
15% on total cost.
[Note: Concession period is a period for which an infrastructure is allowed to operate and recover its
investment]
Ans. (i) Calculation of total project cost per day of concession period:
Activities Amount (` in lakh)
Site clearance 341.00
Land development and filling work 9,160.00
Sub base and base courses 10,520.00
Bituminous work 32,140.00
Bridge, flyovers, underpasses, Pedestrian subway, footbridge, etc 28,110.00
Drainage and protection work 9,080.00

Traffic sign, marking and road appurtenance 8,810.00

Maintenance, repairing and rehabilitation 12,850.00
Environmental management 1,964.00
Administration and toll plaza operation cost 1,200.00
Concession period in days (21 years × 365 days) 7,665
Cost per day of concession period (` in lakh) 14.90
(ii) Computation of toll fee:
Cost to be recovered per day = Cost per day of concession period + 15% profit on cost
= ` 14,90,000 + ` 2,23,500 = ` 17,13,500
Cost per equivalent vehicle = ` 17,13,500
76,444 units (Refer working note)
= ` 22.42 per equivalent vehicle
Vehicle type-wise toll fee:
Sl.No. Type of vehicle Equivalent cost Weight Toll fee per vehicle
[A] [B] [A×B]
1. Two wheelers ` 22.42 1 22.42
2. Car and SUVs ` 22.42 4 89.68
3. Bus and LCV ` 22.42 6 134.52
4. Heavy commercial vehicles ` 22.42 9 201.78
Working Note:
The cost per day has to be recovered from the daily traffic. The each type of vehicle is to be converted
into equivalent unit. Let’s convert all vehicle types equivalent to Two-wheelers..
Sl.No. Type of vehicle Daily traffic Weight Ratio Equivalent Two-
volume [A] [B] wheeler
[A×B]
1. Two wheelers 44,500 0.05 1 44,500
2. Car and SUVs 3,450 0.20 4 13,800
3. Bus and LCV 1,800 0.30 6 10,800
4. Heavy commercial vehicles 816 0.45 9 7,344
Total 76,444
Q-19 Mr. PS owns a bus which runs according to the following schedule:
(i) Delhi to Hisar and back, the same day
Distance covered: 160 km. one way
Number of days run each month: 9
Seating capacity occupied 90%.
(ii) Delhi to Aligarh and back, the same day
Seating capacity occupied 95%

(iii) Delhi to Alwar and back, the same day

Seating capacity occupied 100%
(iv) Following are the other details:
Cost of the bus ` 15,00,000
Salary of the Driver ` 30,000 p.m.
Salary of the Conductor ` 26,000 p.m.
Salary of the part-time Accountant ` 7,000 p.m.
Insurance of the bus ` 6,000 p.a.
Diesel consumption 5 km. per litre at ` 90 per litre
Road tax ` 21,912 p.a.
Lubricant oil ` 30 per 100 km.
Permit fee ` 500 p.m.
Repairs and maintenance ` 5,000 p.m.
Depreciation of the bus @ 30% p.a.
Seating capacity of the bus 50 persons
Passenger tax is 20% of the total takings.
CALCULATE the bus fare to be charged from each passenger to earn a profit of 30% on total takings.
The fares are to be indicated per passenger for the journeys: (i) Delhi to Hisar (ii) Delhi to Aligarh and
(iii) Delhi to Alwar.
Ans. Working Notes:
1. Total Distance (in km.) covered per month
Bus route Km. per trip Trips per day Days per Km. per
month month
Delhi to Hisar 160 2 9 2,880
Delhi to Aligarh 160 2 12 3,840
Delhi to Alwar 170 2 6 2,040
Total 8,760
2. Passenger- km. per month
Total seats available Capacity Km. Passenger-
per month (at 100% utilised per Km. per
capacity) trip month
(%) Seats
Delhi to Hisar & Back 900 90 810 160 1,29,600
(50 seats x 2 trips x 9 (810 seats ×
days) 160 km.)
Delhi to Aligarh
& Back 1,200 95 1,140 160 1,82,400
(50 seats x 2 trips x 12 (1,140 seats
days) × 160 km.)
Delhi to Alwar & 600 100 600 170 1,02,000
Back (50 seats x 2 trips x 6 (600 seats ×
days) 170 km.)
Total 4,14,000

Monthly Operating Cost Statement

Particulars (`) (`)
(i) Running Costs
Diesel {(8,760 km  5 km) x ` 90} 1,57,680.00
Lubricant oil {(8,760 km  100) x ` 30} 2,628.00 1,60,308.00
(ii) Maintenance Costs
Repairs & Maintenance 5,000.00
(iii) Standing charges
Salary to driver 30,000.00
Salary to conductor 26,000.00
Salary of part-time accountant 7,000.00
Insurance (` 6,000 ÷12) 500.00
Road tax (` 21,912 ÷12) 1,826.00
Permit fee 500.00
Depreciation {(` 15,00,000 x 30%)  12} 37,500.00 1,03,326.00
Total costs per month before Passenger Tax
(i)+(ii)+(iii) 2,68,634.00
Passenger Tax* 1,07,453.60
Add: Profit* 1,61,180.40
Total takings per month 5,37,268.00
*Let total takings be X then,
X = Total costs per month before passenger tax + 0.2 X (passenger tax) + 0.3 X (profit)
X = ` 2,68,634 + 0.2 X + 0.3 X
0.5 X = ` 2,68,634 or, X = ` 5,37,268
Passenger Tax = 20% of ` 5,37,268 = ` 1,07,453.60
Profit = 30% of ` 5,37,268 = ` 1,61,180.40
Calculation of Rate per passenger km. and fares to be charged for different routes
Rate per Passenger-Km. = Total takings per month
Total Passenger -Km. per month
` 5,37,268
= = ` 1.30 (approx.)
4,14,000 Passenger-Km.
Bus fare to be charged per passenger:
Delhi to Hisar = ` 1.30 x 160 km = ` 208.00
Delhi to Aligarh = ` 1.30 x 160 km = ` 208.00
Delhi to Alwar = ` 1.30 x 170 km = ` 221.00
Q-20 VPS is a public school having 25 buses each plying in different directions for the transport of its school
students. In view of large number of students availing of the bus service, the buses work two shifts
daily both in the morning and in the afternoon. The buses are garaged in the school. The workload of
the students has been so arranged that in the morning, the first trip picks up senior students and the
second trip plying an hour later picks up junior students. Similarly, in the afternoon, the first trip takes
the junior students and an hour later the second trip takes the senior students home.

The distance travelled by each bus, one way is 8 km. The school works 22 days in a month and remains
closed for vacation in May and June. The bus fee, however, is payable by the students for all the 12
months in a year.
The details of expenses for a year are as under:
Driver’s salary – payable for all the 12 in months ` 12,000 per month per driver
Cleaner’s salary payable for all the 12 months ` 8,000 per month per cleaner
License fees, taxes etc. ` 8,400 per bus per annum
Insurance Premium ` 15,600 per bus per annum
Repairs and Maintenance ` 20,500 per bus per annum
Purchase price of the bus ` 20,00,000 each
Life of the bus 16 years
Scrap value ` 1,60,000
Diesel Cost ` 78.50 per litre
Each bus gives an average of 5 km. per litre of diesel. The seating capacity of each bus is 40 students.
The school follows differential transportation fees based on distance travelled as under:
Students picked up and dropped within Transportation Percentage of students
the range of distance from the school fee availing this facility
2 km. 25% of Full 15%
4 km. 50% of Full 30%
8 km. Full 55%
Due to a pandemic, lockdown imposed on schools and the school remained closed from April 2020 to
December 2020. Drivers and cleaners were paid 75% of their salary during the lockdown period.
Repairing cost reduced to 75% for the year 2020.
Ignore the interest cost.
Required:
(i) PREPARE a statement showing the expenses of operating a single bus and the fleet of 25 buses for
a year.
(ii) FIND OUT transportation fee per student per month in respect of:
(a) Students coming from a distance of upto 2 km. from the school.
(b) Students coming from a distance of upto 4 km. from the school; and
(c) Students coming from a distance of upto 8 km. from the school.
(iii) CALCULATE the minimum bus fare that has to be recovered from the students for the year 2020.
Ans. (i) Statement showing the expenses of operating a single bus and
the fleet of 25 buses for a year
Particulars Per bus Fleet of 25
per annum buses
(` ) per annum
(` )
Running costs : (A)
Diesel (Refer to working note 1) 2,21,056 55,26,400
Repairs & maintenance costs: (B) 20,500 5,12,500

Fixed charges:
Driver’s salary
(` 12,000 × 12 months) 1,44,000 36,00,000
Cleaners salary
(` 8,000 × 12 months) 96,000 24,00,000
Licence fee, taxes etc. 8,400 2,10,000
Insurance 15,600 3,90,000
 `20,00,000 -`1,60,000 
Depreciation  16 years  1,15,000 28,75,000
 
Total fixed charges: (C) 3,79,000 94,75,000
Total expenses: (A+B+C) 6,20,556 1,55,13,900
(ii) Average cost per student per month in respect of students coming from a distance of:
(a) 2 km. from the school {` 6,20,556 / (236 students × 12 months)}
(Refer to Working Note 2) ` 219.12
(b) 4 km. from the school (` 219.12 × 2) ` 438.24
(c) 8 km. from the school (` 219.12 × 4) ` 876.48
(iii) Calculation of minimum bus fare to be recovered from the students during the year 2020:
Statement showing the expenses of operating a single bus in year 2020
Particulars Per bus
per annum
(`)
Running costs : (A)
Diesel (Refer to working note 3) 66,316.80
Repairs & maintenance costs: (B)
(` 20,500 x 0.75) 15,375
Fixed charges:
Driver’s salary 1,17,000
{` 12,000 × 3 months + (75% of ` 12,000 × 9 months)}
Cleaners salary 78,000
{` 8,000 × 3 months + (75% of ` 8,000 × 9 months)}
Licence fee, taxes etc. 8,400
Insurance 15,600
 `20,00,000 -`1,60,000 
Depreciation  16 years  1,15,000
 
Total fixed charges: (C) 3,34,000
Total expenses: (A+B+C) 4,15,691.80

Minimum bus fare to be recovered:

(a) 2 km. from the school {` 4,15,691.8 / (236 students × 12 months)}
(Refer to Working Note 2) ` 146.78
(b) 4 km. from the school (` 146.78 × 2) ` 293.56
(c) 8 km. from the school (`146.78 × 4) ` 587.12
Working Notes:
1. Calculation of diesel cost per bus:
No. of trips made by a bus each day 4
Distance travelled in one trip both ways (8 km. × 2 trips) 16 km.
Distance travelled per day by a bus (16 km. × 4 shifts) 64 km.
Distance travelled during a month (64 km. × 22 days) 1,408 km.
Distance travelled per year (1,408 × 10 months) 14,080 km.
No. of litres of diesel required per bus per year 2,816 litres
(14,080 km. ÷ 5 km.)
Cost of diesel per bus per year (2,816 litres × ` 78.50) ` 2,21,056
2. Calculation of equivalent number of students per bus:
Bus capacity of 2 trips (40 students × 2 trips) 80 students
1/4 th fare students (15% × 80 students) 12 students
½ fare students (30% × 80 students × 2) (equivalent to 1/4 th
fare students) 48 students
Full fare students (55% × 80 students × 4) (equivalent to 1/4th
fare students) 176 students
Total students equivalent to 1/4th fare students 236 students
3. Calculation of diesel cost per bus in Year 2020:
Distance travelled during a month (64 km. × 22 days) 1,408 km.
Distance travelled during the year 2020 (1,408 × 3 months) 4,224 km.
No. of litres of diesel required per bus per year 844.8 litres
(4,224 km. ÷ 5 km.)
Cost of diesel per bus per year (844.8 litres × ` 78.50) ` 66,316.80
Q-21 What do you understand by Build-Operate-Transfer (BOT) approach in Service Costing?

How is the Toll rate computed?
Ans Build-Operate-Transfer (BOT) Approach: In recent years a growing trend emerged among Governments
in many countries to solicit investments for public projects from the private sector under BOT scheme.
BOT is an option for the Government to outsource public projects to the private sector.
With BOT, the private sector designs, finances, constructs and operate the facility and eventually, after
specified concession period, the ownership is transferred to the Government. Therefore, BOT can be
seen as a developing technique for infrastructure projects by making them amenable to private sector
participation.

Toll Rate: In general, the toll rate should have a direct relation with the benefits that the road users
would gain from its improvements. The benefits to road users are likely to be in terms of fuel savings,
improvement in travel time and good riding quality.
To compute the toll rate, following formula may be used
= Total Cost + Profit / Number of Vehicles
Or, to compute the toll rate following formula with rounding off to nearest multiple of five has been
adopted: User fee = Total distance x Toll rate per km.
Q-22 Navya LMV Pvt. Ltd, operates cab/ car rental service in Delhi/NCR. It provides its service to the offices
of Noida, Gurugram and Faridabad. At present it operates CNG fuelled cars but it is also considering to
upgrade these into Electric vehicle (EV). The details related with the owning of CNG & EV propelled
cars are as tabulated below:
Particulars CNG Car EV Car
Car purchase price (`) 9,20,000 15,20,000
Govt. subsidy on purchase of car (`) — 1,50,000
Life of the car 15 years 10 years
Residual value (`) 95,000 1,70,000
Mileage 20 km/kg 240 km per charge
Electricity consumption per full charge — 30 Kwh
CNG cost per Kg (`) 60 —
Power cost per Kwh (`) — 7.60
Annual Maintenance cost (`) 8,000 5,200
Annual insurance cost (`) 7,600 14,600
Tyre replacement cost in every 5 -year (`) 16,000 16,000
Battery replacement cost in every 8- year (`) 12,000 5,40,000
Apart from the above, the following are the additional information:
Particulars
Average distance covered by a car in a month 1,500 km
Driver’s salary (`) 20,000 p.m
Garage rent per car (`) 4,500 p.m
Share of Office & Administration cost per car (`) 1,500 p.m
Required:
CALCULATE the operating cost of vehicle per month per car for both CNG & EV options.
Ans. Working Notes:
1. Calculation of Depreciation per month:
A Car purchase price (`) 9,20,000 15,20,000
B Less: Govt. subsidy (`) — (1,50,000)
C Less: Residual value (`) (95,000) (1,70,000)
D Depreciable value of car (`) [A-B-C] 8,25,000 12,00,000
E Life of the car 15 years 10 years
F Annual depreciation (`) [D÷E] 55,000 1,20,000
G Depreciation per month (`) [F÷12] 4,583.33 10,000

2. Fuel/ Electricity consumption cost per month:

A Average distance covered in a month (KM) 1,500 1,500
B Mileage (KM) 20 240
C Qty. of CNG/ Full charge required [A÷B] 75 kg. 6.25
D Electricity Consumption [C×30kwh] - 187.5
E Cost of CNG per kg (`) 60 -
F Power cost per Kwh (`) - 7.60
G CNG Cost per month (`) [C×E] 4,500 -
H Power cost per month (`) [D×F] - 1,425
3. Amortised cost of Tyre replacement:
A Life of vehicle 15 years 10 years
B Replacement interval 5 years 5 years
C No. of time replacement required 2 times 1 time
D Cost of tyres for each replacement (`) 16,000 16,000
E Total replacement cost (`) [C×D] 32,000 16,000
F Amortised cost per year (`) [E÷A] 2,133.33 1,600
E Cost per month (`) [F÷12] 177.78 133.33
4. Amortised cost of Battery replacement:
A Life of vehicle 15 years 10 years
B Replacement interval 8 years 8 years
C No. of time replacement required 1 time 1 time
D Cost of battery for each replacement (`) 12,000 5,40,000
E Total replacement cost (`) [C×D] 12,000 5,40,000
F Amortised cost per year (`) [E÷A] 800 54,000
E Cost per month (`) [F÷12] 66.67 4,500
Calculation of Operating cost per month:
Particulars CNG Car (`) EV Car (`)
A Running cost:
Fuel cost/ Power consumption cost [Refer WN-2] 4,500 1,425
B Maintenance cost:
Annual Maintenance cost [Annual cost ÷12] 666.67 433.33
Annual Insurance cost [Annual cost ÷12] 633.33 1,216.67
Amortised cost of Tyre replacement [Refer WN-3] 177.78 133.33
Amortised cost of Battery replacement [Refer WN-4] 66.67 4,500
1,544.45 6,283.33
C Fixed cost:
Depreciation [Refer WN-1] 4,583.33 10,000
Driver’s salary 20,000 20,000
Garage rent 4,500 4,500
Share of Office & Administration cost 1,500 1,500
30,583.33 36,000
D Operating cost per month [A+B+C] 36,627.78 43,708.33
---0---0----


CHAPTER- 13
STANDARD COSTING
Q-1 ABC Ltd. had prepared the following estimation for the month of January:
Quantity Rate (`) Amount (`)
Material-A 800 kg. 90.00 72,000
Material-B 600 kg. 60.00 36,000
Skilled labour 1,000 hours 75.00 75,000
Unskilled labour 800 hours 44.00 35,200
Normal loss was expected to be 10% of total input materials and an idle labour time of 5% of expected
labour hours was also estimated.
At the end of the month the following information has been collected from the cost accounting
department:
The company has produced 1,480 kg. finished product by using the followings:
Material-A 900 kg. 86.00 77,400
Material-B 650 kg. 65.00 42,250
(a) Material Cost Variance;
(b) Material Price Variance;
(c) Material Mix Variance;
(d) Material Yield Variance;
(e) Labour Cost Variance;
(f) Labour Efficiency Variance and
(g) Labour Yield Variance.
Ans. Material Variances:
Material SQ SP SQ × SP RSQ RSQ × SP AQ AQ × SP AP AQ × AP
(WN-1) (` ) (`) (WN-2) (`) (`) (` ) (`)
A 940 kg. 90.00 84,600 886 kg. 79,740 900 kg. 81,000 86.00 77,400
B 705 kg. 60.00 42,300 664 kg. 39,840 650 kg. 39,000 65.00 42,250
1645 kg 1,26,900 1550 kg 1,19,580 1550 kg 1,20,000 1,19,650

WN-1: Standard Quantity (SQ):
 800 kg 
Material A-  ×1,480 kg.  = 939.68 or 940 kg.
 0.9 ×1,400kg 
 600 kg 
Material B-  ×1,480 kg.  = 704.76 or 705 kg.
 0.9 ×1,400kg 
WN- 2: Revised Standard Quantity (RSQ):
 800 kg 
Material A-  ×1,550 kg.  = 885.71 or 886 kg.
 1,400kg 
 600 kg 
Material B-  ×1,550 kg.  = 664.28 or 664 kg.
 1,400kg 
(a) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}
= {1,26,900 – 1,19,650} = 7,250 (F)
(b) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)
= {1,20,000 – 1,19,650} = 350 (F)
(c) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}
= {1,19,580 – 1,20,000} = 420 (A)
(d) Material Yield Variance (A + B) = {(SQ × SP) – (RSQ × SP)}
= {1,26,900 – 1,19,580} = 7,320 (F)
Labour Variances: Labour
Labour SH SR SH × SR RSH RSH × SR AH AH × SR AR AH × AR
(WN-3) (`) (` ) (WN-4) (` ) (`) (`) (` )
Skilled 1,116 hrs 75.00 83,700 1144 85,800 1,200 90,000 71.00 85,200
Unskilled 893 hrs 44.00 39,292 916 40,304 860 37,840 46.00 39,560
2,009 hrs 1,22,992 2,060 1,26,104 2,060 1,27,840 1,24,760
WN- 3: Standard Hours (SH):
 0.95 ×1,000hr 
Skilled labour-  ×1,480 kg.  = 1,115.87 or 1,116 hrs.
 0.90 × 1,400kg 
 0.95 × 8,00hr 
Unskilled labour-  ×1,480 kg.  = 892.69 or 893 hrs.
 0.90 × 1,400kg 
WN- 4: Revised Standard Hours (RSH):
 1,000 hr. 
Skilled labour-  × 2,060 hr.  = 1.144.44 or 1,144 hrs.
 1,800hr. 
 8,00 hr. 
Unskilled labour-  ×2,060 hr.  = 915.56 or 916 hrs.
 1,800hr. 
-424- Chapter-13 : Standard Costing

(e) Labour Cost Variance (Skilled + Unskilled) = {(SH × SR) – (AH × AR)}
= {1,22,992 – 1,24,760} = 1,768 (A)
(f) Labour Efficiency Variance (Skilled + Unskilled) = {(SH × SR) – (AH × SR)}
= {1,22,992 – 1,27,840} = 4,848 (A)
(g) Labour Yield Variance (Skilled + Unskilled) = {(SH × SR) – (RSH × SR)}
= {1,22,992 – 1,26,104} = 3,112 (A)
Q-2 JVG Ltd. produces a product and operates a standard costing system and value material and finished
goods inventories at standard cost. The information related with the product is as follows:
Particulars Cost per unit (`)
Direct materials (30 kg at `350 per kg) 10,500
Direct labour (5 hours at `80 per hour) 400
The actual information for the month just ended is as follows:
(a) The budgeted and actual production for the month of September 2019 is 1,000 units.
(b) Direct materials –5,000 kg at the beginning of the month. The closing balance of directmaterials
for the month was 10,000 kg. Purchases during the month were made at‘ 365 per kg. The actual
utilization of direct materials was 7,200 kg more than thebudgeted quantity.
(c) Direct labour – 5,300 hours were utilised at a cost of ` 4,34,600.
Required:
Calculate (i) Direct material price and usage variances (ii) Direct labour rate and efficiency variances.
Ans. Working:
Quantity of material purchased and used.
No. of units produced 1,000 units
Std. input per unit 30kg.
Std. quantity (Kg.) 30,000 kg.
Add: Excess usage 7,200 kg.
Actual Quantity 37,200 kg.
Add: Closing Stock 10,000 kg.
Less: Opening stock 5,000 kg.
Quantity of Material purchased 42,200 kg.
(i) Direct Material Price Variance:
= Actual Quantity purchased (Std. Price – Actual Price)
= 42,200 kg.(`350 – `365) = 6,33,000 (Adverse)
Direct Material Usage Variance:
= Std. Price (Std. Quantity – Actual Quantity)
= ` 350 (30,000 kg. – 37,200 kg.) = ` 25,20,000 (Adverse)
(ii) Direct Labour Rate Variance:
= Actual hours (Std. Rate – Actual Rate)
= 5,300 hours (`80 – ` 82) = ` 10,600 (Adverse)
Direct Labour Efficiency Variance:
= Std. Rate (Std. hours – Actual hours)
= ` 80 (1,000 units × 5 hours – 5,300 hours) = ` 24,000 (Adverse)

Q-3 ABC Ltd. had prepared the following estimation for the month of April:
Material-A 800 kg. 45.00 36,000
Material-B 600 kg. 30.00 18,000
department:
Material-A 900 kg. 43.00 38,700
Material-B 650 kg. 32.50 21,125
(a) Material Cost Variance; (b) Material Price Variance;
(c) Material Mix Variance; (d) Material Yield Variance;
(e) Labour Cost Variance; (f) Labour Efficiency Variance and
(g) Labour Yield Variance.
Material SQ SP SQ × SP RSQ RSQ × SP AQ AQ × SP AP AQ × AP
(WN-1) (`) (`) (WN-2) (`) (`) (`) (`)
A 940 kg. 45.00 42,300 886 kg. 39,870 900 kg. 40,500 43.00 38,700
B 705 kg. 30.00 21,150 664 kg. 19,920 650 kg. 19,500 32.50 21,125
1645 kg 63,450 1550 kg 59,790 1550 kg 60,000 59,825
 800 kg. 
Material A-   1,480 kg.   939.68 or 940kg.
 0.9  1,400 kg. 
 600 kg. 
Material B-   1,480 kg.  = 704.76 or 705 kg.
 0.9  1,400 kg. 
 800 kg. 
Material A-   1,550 kg.  = 664.28 or 664 kg. = 885.71 or 886 kg.
 1,400 kg. 

 600 kg. 
Material B-   1,550 kg.  = 664.28 or 664 kg. = 664.28 or 664 kg.
 1,400 kg. 
(a) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}
= {63,450 – 59,825} = 3,625 (F)
(b) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)
= {60,000 – 59,825} = 175 (F)
(c) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}
= {59,790 – 60,000} = 210 (A)
(d) Material Yield Variance (A + B) = {(SQ × SP) – (RSQ × SP)}
= {63,450 – 59,790} = 3,660 (F)
Labour Variances:
(WN-3) (`) (`) (WN-4) (`) (`) (`) (`)
Skilled 1,116 hrs 37.50 41,850 1144 42,900 1,200 45,000 35.50 42,600
Unskilled 893 hrs 22.00 19,646 916 20,152 860 18,920 23.00 19,780
2,009 hrs 61,496 2,060 63,052 2,060 63,920 62,380
 0.95  1,000hr. 
Skilled labour-  × 1,480 kg.  = 1,115,87 or 1,116 hrs.
 0.90  1,400kg. 
 0.95  8000 hr. 

Unskilled labour-  × 1,480 kg.  = 892.69 or 893 hrs.
 0.90  1,400 kg. 
 1,000 hr. 
Skilled labour-  × 2,060 kg.  = 1,144.44 or 1,144 hrs.
 1,800 hr. 
 800 hr. 
Unskilled labour-  × 2,060 hr.  = 915.56 or 916 hrs.
 1,800 hr. 
(e) Labour Cost Variance (Skilled + Unskilled) = {(SH × SR) – (AH × AR)}
= {61,496 – 62,380} = 884 (A)
(f) Labour Efficiency Variance (Skilled + Unskilled) = {(SH × SR) – (AH × SR)}
= {61,496 – 63,920} = 2,424 (A)
(g) Labour Yield Variance (Skilled + Unskilled) = {(SH × SR) – (RSH × SR)}
= {61,496 – 63,052} = 1,556 (A)

Q-4 Aaradhya Ltd.manufactures a commercial product for which the standard cost per unit is as follows:
(` )
Material:
5 kg. @ ` 4 per kg. 20.00
Labour:
3 hours @ `10 per hour 30.00
Overhead
Variable: 3 hours @ `1 3.00
Fixed: 3 hours @ `0.50 1.50
Total 54.50
During Jan. 20X8, 600 units of the product were manufactured at the cost shown below:
(` )
Materials purchased:
5,000 kg. @ `4.10 per kg. 20,500
Materials used:
3,500 kg.
Direct Labour:
1,700 hours @ ` 9 15,300
Variable overhead 1,900
Fixed overhead 900
Total 38,600
The flexible budget required 1,800 direct labour hours for operation at the monthly activity level used to set
the fixed overhead rate.
Compute :
(a) Material price variance, (b) Material Usage variance; (c) Labour rate variance; (d) Labour efficiency variance;
(e) Variable overhead expenditure variance; (f) Variable overhead efficiency variance; (g) Fixed overhead
expenditure variance; (h) Fixed overhead volume variance; (i) Fixed overhead capacity variance; and (j)
Fixed overhead efficiency variance.
Also RECONCILE the standard and actual cost of production.
Ans.
(a) Material price variance:
= (Standard price – Actual Price) × Actual quantity
= (` 4 – ` 4.10) × 5,000 = ` 500 Adv.
(b) Material usage variance:
= (Std. quantity for actual output – Actual qtty.) × Std. price
= (600 × 5 – 3,500) × 4 = ` 2,000 Adv.
(c) Labour Rate Variance:
= (Standard rate – Actual rate) × Actual hours
= (`10 – `9) × 1,700 = ` 1,700 Fav.
(d) Labour Efficiency Variance:
= (Standard hours for actual output – Actual hours) × Standard rate
= (600 × 3 – 1,700) × `10
= ` 1,000 Fav.

(e) Variable Overhead Expenditure Variance

= (Actual Hours × Standard Rate) – Actual Overhead
= (1,700 ×` 1) – ` 1,900
= ` 200 Adv.
(f) Variable Overhead Efficiency Variance:
= Std. hours for actual output – Actual hours) × Std. rate
= (600 × 3 – 1,700) × `1 = `100 Fav.
(g) Fixed Overhead Expenditure Variance:
= (Budgeted overhead – Actual overhead)
= (1,800 × 0.50 – 900) = Nil
(h) Fixed Overhead Volume Variance:
= (Std. hours for actual output – Budgeted hours) × Std. rate
= (600 × 3 – 1,800) × ` 0.50 = Nil
(i) Fixed Overhead Capacity Variance:
= (Budgeted hours – Actual Hours) × Standard rate
= (1,800 – 1,700) × ` 0.50 = ` 50 Adv.
(j) Fixed Overhead Efficiency Variance:
= (Std. hours for actual output – Actual hours) × Standard rate
= (600 × 3 – 1,700) × ` 0.50 = ` 50 Fav.
Verification: (`) (`)
Overhead recovered: 600 units @ `4.50 2,700
Actual Overhead:
Variable 1,900
Fixed 900 2,800
100 Adv.
Variable expenditure variance 200 Adv
Variable Efficiency variance 100 Fav.
Fixed expenditure variance Nil
Fixed overhead volume variance Nil
100 Adv.
Reconciliation Statement
Standard Cost: 600 units @ `54.50 32,700
Actual Cost: 38,600
Less: Material Stock at standard cost: (1,500 × `4) 6,000 (32,600) 100 Fav.
Variances: Adv. (`) Fav. (`)
Material price 500
Material usage 2,000
Labour rate 1,700
Labour efficiency 1,000
Variable expenditure 200
Variable efficiency 100
Total 2,700 2,800 100 Fav.

Q-5 ABC Ltd. had prepared the following estimation for the month of April:
Material-A 800 kg. 45.00 36,000
Material-B 600 kg. 30.00 18,000
department:
Material-A 900 kg. 43.00 38,700
Material-B 650 kg. 32.50 21,125
Required:
CALCULATE:
(i) Material Cost Variance;
(ii) Material Price Variance;
(iii) Material Mix Variance;
(iv) Material Yield Variance;
(v) Labour Cost Variance;
(vi) Labour Efficiency Variance and
(vii) Labour Yield Variance.
Material SQ SP SQ × SP RSQ RSQ × SP AQ AQ x SP AP AQxAP
(WN-1) (`) (`) (WN-2) (`) (`) (`) (`)
A 940 kg. 45.00 42,300 886 kg. 39,870 900 kg. 40,500 43.00 38,700
B 705 kg. 30.00 21,150 664 kg. 19,920 650 kg. 19,500 32.50 21,125
1645 kg 63,450 1550 kg 59,790 1550 kg 60,000 59,825
 800 kg. 
Material A-   1,480 kg.  = 939.68 or 940 kg.
 0.9  1,400 kg. 
 600 kg. 
 0.9  1,400 kg. 

 800 kg. 
Material A-   1,550 kg.  = 885.71 or 886 kg.
 1,400 kg. 
 600 kg. 
 1,400 kg. 
(i) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}
= {63,450 – 59,825} = 3,625 (F)
(ii) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)
= {60,000 – 59,825} = 175 (F)
(iii) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}
= {59,790 – 60,000} = 210 (A)
(iv ) Material Yield Variance (A + B) = {(SQ × SP) – (RSQ × SP)}
= {63,450 – 59,790} = 3,660 (F)
Labour Variances:
(WN-3) (`) (`) (WN-4) (`) (`) (`) (`)
Skilled 1,116 hrs 37.50 41,850 1144 42,900 1,200 45,000 35.50 42,600
Unskilled 893 hrs 22.00 19,646 916 20,152 860 18,920 23.00 19,780
2,009 hrs 61,496 2,060 63,052 2,060 63,920 62,380
 0.95  1,000 hr. 

Skilled labour-   1,480 kg.  =1,115.87 or 1,116 hrs.
 0.90  1,400 kg. 
 0.95  800 hr. 

Unskilled labour-   1,480 kg.  = 892.69 or 893 hrs.
 0.90  1,400 kg. 
 1,000 hr. 
Skilled labour-   2,060 hr.  = 1,144.44 or 1,144 hrs.
 1,800 kg. 
 800 hr. 
Unskilled labour-   2,060 hr.  = 915.56 or 916 hrs.
 1,800 hr. 
(v) Labour Cost Variance (Skilled + Unskilled) = {(SH × SR) – (AH × AR)}
= {61,496 – 62,380} = 884 (A)
(vi) Labour Efficiency Variance (Skilled + Unskilled) = {(SH × SR) – (AH × SR)}
= {61,496 – 63,920} = 2,424 (A)
(vii) Labour Yield Variance (Skilled + Unskilled) = {(SH × SR) – (RSH × SR)}
= {61,496 – 63,052} = 1,556 (A)

Q-6 The standard cost of a chemical mixture is as follows : 60% of Material A @ ` 50 per kg 40% Material B @
` 60 per kg .
A standard loss of 25% on output is expected in production. The cost records for a period has shown the
following usage.
540 kg of Material A @ ` 60 per kg
260 kg of Material B @ ` 50 per kg
The quantity processed was 680 kilograms of good product. From the above given information
Calculate:
(i) Material Cost Variance (ii) Material Price Variance
(iii) Material Usage Variance (iv) Material Mix Variance
(v) Material Yield Variance
Ans.
Basic Calculation
Material Standard for 640 kg. output Actual for 680 kg. output
Qty. Rate Amount Qty Rate Amount
Kg. (`) (`) Kg. (`) (`)
A 480 50 24,000 540 60 32,400
B 320 60 19,200 260 50 13,000
Total 800 43,200 800 45,400
Less: Loss 160 - - 120 - -
640 43,200 680 45,400
Std. cost of actual output = ` 43,200 × 680/640 = ` 45,900
Calculation of Variances
(i) Material Cost Variance = (Std. cost of actual output – Actual cost)
= (45,900– 45,400)
= ` 500 (F)
(ii) Material Price Variance = (SP – AP) × AQ
Material A = (50 – 60) × 540 = ` 5400 (A)
Material B = (60 – 50)) × 260 = ` 2600 (F)
MPV = ` 2800 (A)
(iii) Material Usage Variance (MUV) = (Std. Quantity for actual output – Actual Quantity) × Std. Price
 480 ×680 
Material A =  - 540  × 50 = ` 1,500 (A)
 640 
 320 × 680 
Material B =  -260  × 60 = ` 4,800 (F)
 640 
MUV = ` 3,300 (F)

(iv) Material Mix Variance = SP × (RAQ – AQ)

A = ` 50× (480 Kg – 540 Kg) = ` 3,000 (A)
B = ` 60 × (320 Kg. – 260 Kg.) = ` 3,600 (F)
Total = ` 3,000 (A) + `3,600 (F) = ` 600 (F)
(v) Material Yield Variance = SP × (SQ – RAQ)
A = ` 50 × (510 Kg. – 480 Kg) = ` 1,500 (F)
B = ` 60 × (340 Kg. – 320 Kg.) = ` 1,200 (F)
Total = ` 1,500 (F) + ` 1,200 (F) = ` 2,700 (F)
Q-7 A gang of workers normally consists of 30 skilled workers, 15 semi-skilled workers and 10 unskilled
workers. They are paid at standard rate per hour as under:
Skilled ` 70
Semi-skilled ` 65
Unskilled ` 50
In a normal working week of 40 hours, the gang is expected to produce 2,000 units of output. During the
week ended 31st March, 2019, the gang consisted of 40 skilled, 10 semi-skilled and 5 unskilled workers.
The actual wages paid were at the rate of ` 75,` 60 and ` 52 per hour respectively. Four hours were lost
due to machine breakdown and 1,600 units were produced.
Calculate the following variances showing clearly adverse (A) or favourable (F)
(i) Labour Cost Variance (ii) Labour Rate Variance
(iii) Labour Efficiency Variance (iv) Labour Mix Variance
(v) Labour Idle Time Variance
Ans. (i) Labour Cost Variance = Standard Cost – Actual Cost
= ` 1,14,400 – `1,54,400 = 40,000 (A)
(1,600*75 + 400*60 + 200 *52 = ` 1,54,400)
Or
Types of workers Standard Cost – Actual Cost Amount (`)
Skilled Workers (30 x 40 x 70/2,000 x 1,600)- (40 x 40 x75)67,200-1,20,000 52,800 (A)
Semi- Skilled (15 x 40 x 65/2,000 x 1,600)- (10 x 40 x 60)31,200-24,000 7,200 (F)
Un-Skilled Workers (10 x 40 x 50/2,000 x 1,600)- (5 x 40 x 52)16,000-10,400 5,600 (F)
Total 1,14,400-1,54,400 40,000 (A)
(ii) Labour Rate Variance
Types of workers Actual Hours × (Standard Rate -Actual Rate) Amount (`)
Skilled Workers 1,600 hours × (` 70.00 – `75.00) 8,000 (A)
Semi- Skilled 400 hours × (`65.00 – ` 60.00) 2,000 (F)
Un-Skilled Workers 200 hours × (` 50.00 – ` 52.00) 400 (A)
Total ` 8,000 (A) + `2,000 (F) + `400 (A) 6,400 (A)

(iii) Labour Efficiency Variance

Types of workers Standard Rate × (Standard Hours –Actual Hours) Amount(`)
Skilled Workers `70.00 × (960 hours – 1,440 hours) 33,600 (A)
Semi- Skilled `65.00 × (480 hours – 360 hours) 7,800 (F)
Un-Skilled Workers `50.00 × (320 hours – 180 hours) 7,000 (F)
Total 33,600 (A) + 7,800 (F) + 7,000 (F) 18,800 (A)
Alternatively labour efficiency can be calculated on basis of labour hours paid
Types of workers Standard Rate × (Standard Hours –Actual Hours) Amount(`)
Skilled Workers 70.00 × (960 hours – 1600 hours) 44,800 (A)
Semi- Skilled 65.00 × (480 hours – 400 hours) 5,200 (F)
Un-Skilled Workers 50.00 × (320 hours – 200 hours) 6,000 (F)
Total 33,600 (A) + 7,800 (F) + 7,000 (F) 33,600 (A)
(iv) Labour Mix Variance
= Total Actual Time Worked (hours) × {Average Standard Rate per hour of Standard Gang Less
Average Standard Rate per hour of Actual Gang}
@on the basis of hours worked
 `1,14,400 1,440hrs.`70  360hrs.`65  180hrs.` 50 

= 1,980 hours ×   
 1,760hrs. 1,980hrs. 
= ` 4,500 (A)
Or
Labour Mix Variance
Types of workers Std. Rate ? (Revised Actual Hours Worked
Actual Hours Worked) Amount (`)
Skilled Workers `70 × (1,080 hrs. – 1440 hrs.) 25,200 (A)
Semi- Skilled `65 × (540 hrs. – 360 hrs.) 11,700 (F)
Un Skilled Workers `50 × (360 hrs. – 180 hrs.) 9,000 (F)
Total `25,200 (A) + `11,700 (F) + `9,000 (F) 4,500 (A)
(v) Labour Idle Time Variance
Types of workers Standard Rate × (Hours Paid – HoursWorked) Amount (`)
Skilled Workers `70.00 × (1,600 hours – 1,440 hours) 11,200 (A)
Semi- Skilled `65.00 × (400 hours – 360 hours) 2,600 (A)
Un-Skilled Workers `50.00 × (200 hours – 180 hours) 1,000 (A)
Total 11,200 (A) + 2,600 (A) + 1,000 (A) 14,800 (A)
Verification:
Labour Cost Variance
= Labour Rate Variance + Labour Efficiency Variance + Labour Idle Time Variance
= 6,400 (A) + 18,800 (A) + 14,800 (A) = ` 40,000 (A)

Labour Cost Variance

= Labour Rate Variance + Labour Efficiency Variance
= 6400(A) + 33600(A)= ` 40000(A)
In this case, labour idle time variance is a part of labour efficiency variance.
Working Notes:
Category Standard Cost Actual (1600 units) Revised
Actual Hours
Hrs. Rate Amt. (`) Hrs. Rate Amt. (`)
Skilled 960 70.00 67,200 1,440 1,08,000 1,080
(30 W x 40
x 1,600/2,000) (40Wx36) 75.00 (1,980x6/11)
SemiSkilled 480 65.00 31,200 360 21,600 540
(15Wx40 x
1,600/2,000) (10Wx36) 60.00 (1,980x3/11)
Unskilled 320(10Wx40 50.00 16,000 180 52.00 9,360 360
x1,600/2,000) (5Wx36) (1,980x2/11)
Total 1,760 65 1,14,400 1,980 1,38,960 1,980
Q-8 A manufacturing concern has provided following information related to fixed overheads:
Standard Actual
Output in a month 5000 units 4800 units
Working days in a month 25 days 23 days
Fixed overheads ` 5,00,000 ` 4,90,000
Compute:
(i) Fixed overhead variance
(ii) Fixed overhead expenditure variance
(iii) Fixed overhead volume variance
(iv) Fixed overhead efficiency variance
Ans. Calculation of Variances :
(i) Fixed Overhead Variance: Standard fixed overhead – Actual fixed overhead
= ` [ (5,00,000÷5000) ×4800] – ` 4,90,000 = ` 10,000 (A)
(ii) Fixed Overhead Expenditure Variances:
Budgeted fixed overhead – Actual fixed overhead
= ` 5,00, 000 – ` 4,90, 000 = ` 10,000 (F)
(iii) Fixed Overhead Volume Variance: Standard fixed overhead – Budgeted fixed overhead
= ` 4,80, 000 – ` 5,00, 000 = ` 20,000 (A)
(iv) Fixed Overhead efficiency Variance: Standard fixed overhead – Budgeted fixed overhead for
Actual days
= ` 4,80, 000 – [(` 5,00, 000÷25) ×23] = ` 20,000 (F)

Q-9 (i) The following details are provided by M/s. SKU Enterprises for the year ended 31st March, 2018:
Particulars Material-M (`) Material-N (`) Stock as on 01-04-2017 6,00,000 10,00,000 Stock as on 31-03-
2018 4,50,000 7,25,000 Purchases during the year 9,50,000 18,40,000 You are required to: (i) Calculate
Turnover Ratio of both the materials. (ii) Advise which of the two materials is fast moving. (Assume 360
days in a year). (5 Marks) (ii) Beta Ltd. is manufacturing Product N. This is manufactured by mixing two
materials namely Material P and Material Q. The Standard Cost of Mixture is as under: Material P 150
ltrs. @ ` 40 per ltr. Material Q 100 ltrs. @ ` 60 per ltr. Standard loss @ 20 of total input is expected during
production. The cost records for the period exhibit following consumption: Material P 140 ltrs. @ ` 42
per ltr, Material Q 110 ltrs. @ ` 56 per ltr, Quantity produced was 195 ltrs. Calculate: (i) Material Cost
Variance (ii) Material Usage Variance. (iii) Material Price Variance.
Ans.
(i) Material M Material N
Turnover ratio Turnover ratio
= Cost of stock of raw material consumed = Cost of stock of raw material consumed
Average stock of raw material Average stock of raw material
= ` 6,00,000 + ` 9,50,000- ` 4,50,000 = 2.09 = ` 10,00,000 + ` 18,40,000- ` 7,25,000.
(6,00,000+ 4,50,000) / 2 (10,00,000+ 7,25,000) / 2
Average number of days for which the =2.45
average inventory is held Average number of days for which the
= 360 average inventory is held
Inventory turnover ratio
= 360 days = 360 / Inventory turnover ratio
2.09
= 172.25 days = 360 days / 2.45
= 146.94 days
(ii) Advice
Comparatively Material M is slower than Material N since Inventory holding period of ‘M’ is 172.25
days in Comparison to ‘N’ i.e. 146.94 days. Infact, both materials have slow inventory turnover. Though,
different business has their own expected rates for inventory turnover like food shops have fast
inventory turnover, shop selling furniture etc. will have slower inventory turnover while manufacturers
of large items of plant will have very long inventory turnover.
If it is not as per the Industry Standard, then a slow turnover may indicate that excessive inventory is
held and risk of obsolete or spoiled inventory will increase.
Large quantity of slow moving material means that capital is locked up in business and not earning
revenue. It is advisable to make proper investigations into slow moving materials and take steps to
minimize the loss arises therefrom as it may impact overall financial health of the organisation.
Q-10 The following standards have been set to manufacture a product:
Direct Materials: (Rs.)
2 units of X at Rs.40 per unit 80.00
3 units of Y at Rs. 30 per unit 90.00
15 units of Z at Rs.10 per unit 150.00
320.00
Direct labour 3 hours @ Rs. 55 per hour 165.00
Total standard prime cost 485.00

The company manufactured and sold 6,000 units of the product during the year 20X8.
Direct material costs were as follows:
12,500 units of X at Rs. 44 per unit.
18,000 units of Y at Rs. 28 per unit.
88,500 units of Z at Rs.12 per unit.
The company worked 17,500 direct labour hours during the year 20X8. For 2,500 of these hours the
company paid at Rs. 58 per hour while for the remaining hours the wages were paid at the standard
rate.
Required:
COMPUT E the following variances:
Material Price, Material Usage, Material Mix, Material Yield, Labour Rate and Labour Efficiency.
Ans. Material Price Variance = Actual Quantity (Std. Price – Actual Price)
X = 12,500 units (Rs.40 – Rs.44) = 50,000 (A)
Y = 18,000 units (Rs.30 – Rs.28) = 36,000 (F)
Z = 88,500 units (Rs.10 – Rs.12) = 1,77,000 (A) 1,91,000 (A)
Material Usage Variance = Std. Price (Std. Qty – Actual Qty.)
X = Rs.40 (6,000 × 2 – 12,500) = 20,000 (A)
Y = Rs.30 (6,000 × 3 – 18,000) = Nil
Z = Rs.10 (6,000 × 15 – 88,500) = 15,000 (F) 5,000 (A)
Material Mix Variance = Std. Price (Revised Std. Qty. – Actual Qty.)
 1,19,000 × 2 
X = Rs.40   12,500  = 24,000 (A)
 20 
 1,19,000 × 3 
Y = Rs.30   18,000  = 4,500 (A)
 20 
 1,19,000 × 15 
Z = Rs.10   88,500  = 7,500 (F) 21,000 (A )
 20 
Material Yield Variance = Std. Price (Std. Qty. – Revised Std. Qty.)
1,19, 000  2
X = Rs.40 (6,000 × 2 - ) = 4,000 (F)
20
1,19, 000  3
Y = Rs.30 (6,000 × 3 - )= 4,500 (F)
20
1,19, 000  15
Z = Rs.10 (6,000 × 15 - ) = 7,500 (F) 16,000 (F)
20
Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 2,500 hours (Rs.55 – Rs.58) = 7,500 (A)
Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= Rs.55 (6,000 × 3 – 17,500) = 27,500 (F)

Q-11 BBC Ltd. manufactures Ordinary Portland Cement (OPC). T he standard data for the raw materials that
are used to manufacture OPC are as follows:
Raw Material Composition (%) Rate per Metric Ton (Rs.)
Limestone 65 565
Silica 20 4,800
Alumina 5 32,100
Iron ore 5 1,800
Others 5 2,400
During the month of February 20X8, A Ltd. produced 500 MT OPC. Actual data related with the
consumption and costs are as follows:
Raw Material Quantity (MT) Total Cost (Rs.)
Limestone 340 1,90,400
Silica 105 5,09,250
Alumina 25 8,12,500
Iron ore 30 53,400
Others 23 51,750
You are required to COMPUTE the following variances related with the production of OPC for the
month of February 20X8:
(i) Material Price Variance
(ii) Material Mix Variance
(iii) Material Yield Variance
(iv) Material Cost Variance.
Ans. (i) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
 Rs.1,90,400 
Limestone = 340  Rs.565 - 
 340 
= 340 (Rs. 565 - Rs. 560) = 1,700 (F)
 Rs.5,09,250 
Silica = 105  Rs.4,800 - 
 150 
= 105 (Rs. 4,800 - Rs. 4,850) = 5,250 (A)
 Rs.8,12,500 
Alumina = 25  Rs.32,100 - 
 25 
= 25 (Rs. 32,100 - Rs. 32,500) = 10,000 (A)
 Rs.53,400 
Iron ore = 30  Rs.1,800 - 
 30 
= 30 (Rs. 1,800 - Rs. 1,780) = 600 (F)
 Rs.51,750 
Others = 23  Rs.2,400 - 
 23 
= 23 (Rs. 2,400 - Rs. 2,250) = 3,450 (F)
9,500 (A)

(ii) Material Mix Variance = Std. Price (Revised Std. Quantity – Actual Quantity)
Limestone = Rs. 565 (523 × 65% - 340)
= Rs. 565 (339.95 - 340) = 28.25 (A)
Silica = Rs. 4,800 (523 × 20% - 105)
= Rs. 4,800 (104.6 - 105) = 1,920 (A)
Alumina = Rs. 32,100 (523 × 5% - 25)
= Rs. 32,100 (26.15 - 25) = 36,915 (F)
Iron ore = Rs. 1,800 (523 × 5% - 30)
= Rs. 1,800 (26.15 - 30) = 6,930 (A)
Others = Rs. 2,400 (523 × 5% - 23)
= Rs. 2,400 (26.15 - 23) = 7,560 (F)
35,596.75 (F)
(iii) Material Yield Variance = Std. Price (Standard Quantity – Revised Std. Quantity)
Limestone = Rs. 565 (500 × 65% - 523 × 65%)
= Rs. 565 (325 - 339.95) = 8,446.75 (A)
Silica = Rs. 4,800 (500 × 20% - 523 × 20%)
= Rs. 4,800 (100 - 104.6) = 22,080 (A)
Alumina = Rs. 32,100 (500 × 5% - 523 × 5%)
= Rs. 32,100 (25 - 26.15) = 36,915 (A)
Iron ore = Rs. 1,800 (500 × 5% - 523 × 5%)
= Rs. 1,800 (25 - 26.15) = 2,070 (A)
Others = Rs. 2,400 (500 × 5% - 523 × 5%)
= Rs. 2,400 (25 - 26.15) = 2,760 (A)
72,271.75 (A)
(iv) Material Cost Variance = (Std. Quantity × Std. Price) – (Actual Quantity × Actual Price)
Limestone = Rs. 565 × (500 × 65%) - Rs. 1,90,400
= Rs. 1,83,625 - Rs. 1,90,400 = 6,775 (A)
Silica = Rs. 4,800 × (500 × 20%) - Rs. 5,09,250
= Rs. 4,80,000 – Rs. 5,09,250 = 29,250 (A)
Alumina = Rs. 32,100 (500 × 5%) – Rs. 8,12,500
= Rs. 8,02,500 – Rs. 8,12,500 = 10,000 (A)
Iron ore = Rs. 1,800 (500 × 5%) – Rs. 53,400
= Rs. 45,000 – Rs. 53,400 = 8,400 (A)
Others = Rs. 2,400 (500 × 5%) – Rs. 51,750
= Rs. 60,000 – Rs. 51,750 = 8,250 (F)
46,175 (A)

Q-12 The standard labour component and the actual labour component engaged in a week for a job are as
follows:
Skilled Semi-skilled Un-Skilled
Workers Workers workers
Standard number of workers in the gang 32 12 6
Standard wage rate per hour (`) 30 20 10
Actual number of workers employed in the gang
during the week 28 18 4
Actual wages rate per hour (`) 34 23 12
During the 40 hours working week the gang produced 1,800 standard labour hours of work.
CALCULATE:
(i) Total labour cost variance;
(ii) Labour yield variance;
(iii) Labour mix variance; and
(iv) Labour wage rate variance.
Ans. Work produced by the gang 1,800 standard labour hours, i.e.,
1, 800
or 36 gang hours
32 + 12 + 6
Standard hours of Skilled Labour (36 x 32) 1,152 hours
Standard hours of Semi-skilled Labour (36 x 12) 432 hours
Standard hours of Un-skilled Labour (36 x 6) 216 hours
Total 1,800 hours
Actual hours of Skilled Labour (40 x 28) 1,120 hours
Actual hours of Semi-skilled Labour (40 x 18) 720 hours
Actual hours of Un-skilled Labour (40 x 4) 160 hours
Total 2,000 hours
Revised Standard hours (actual hours worked expressed in standard ratio)
1,152
Skilled Labour × 2,000 1,280 hours
1,800
432
Semi-skilled Labour × 2,000 480 hours
1,800
216
Unskilled Labour × 2,000 240 hours
1,800
2,000 hours
Standard Cost for Actual Output: `
Skilled Labour 1,152 hours @ ` 30 34,560
Semi-skilled Labour 432 hours @ ` 20 8,640
Unskilled Labour 216 hours @ ` 10 2,160
1,800 hours 45,360

Actual Cost:
Skilled Labour 1,120 hours @ ` 34 38,080
Semi-skilled Labour 720 hours @ ` 23 16,560
Unskilled Labour 160 hours @ ` 12 1,920
2,000 hours 56,560
(i) Total Labour Cost Variance
Standard Cost- Actual Cost `
` 45,360 - ` 56,560 11,200 (A)
(ii) Labour Yield Variance:

(Standard hours for Actual Output - Revised Standard hours) x Standard Rate
Skilled (1,152 - 1,280) x ` 30 3,840 (A)
Semi -skilled (432 - 480) x ` 20 960 (A)
Un-skilled (216 - 240) x ` 10 240 (A)
5,040 (A) 5,040 (A)
(iii) Labour Mix Variance:
(Revised Standard Hours - Actual Hours) x Standard Rate
Skilled (1,280 - 1,120) x ` 30 4,800 (F)
Semi-skilled (480-720) x ` 20 4,800 (A)
Un-skilled (240-160) x ` 10 800 (F)
800 (F) 800 (F)
(iv) Labour Wage Rate Variance:
(Standard Rate - Actual Rate) x Actual Hours
Skilled (` 30 - ` 34) x 1,120 4,480 (A)
Semi-skilled (` 20 - ` 23) x 720 2,160 (A)
Un-skilled (` 10 - ` 12) x 160 320 (A)
6,960 (A) 6,960 (A)
Check : Total Labour Cost Variance = Yield + Mix + Rate 11,200 (A)
Q-13 Z. Ltd. uses standard costing system in manufacturing of its single product ‘M’. The standard cost per
unit of M is as follows: Rs.
Direct Material – 2 metres @ Rs. 6 per metre 12.00
Direct labour- 1 hour @ Rs. 4.40 per hour 4.40
Variable overhead- 1 hour @ Rs. 3 per hour 3.00
During July, 2016, 6,000 units of M were produced and the related data are as under:
Direct material acquired- 19,000 metres @ Rs.5.70 per metre.
Material consumed – 12,670 metres.
Direct labour – ? hours @ Rs. ? per hour Rs. 27,950
Variable overheads incurred Rs. 20,475

The variable overhead efficiency variance is Rs. 1,500 adverse. Variable overheads are based on direct
labour hours. There was no stock of the material in the beginning
You are required to DETERMINE the missing figures and work out all the relevant variances.
Ans. Working Notes
Standard Costs
Rs.
Direct materials (6,000 × Rs. 12) 72,000
Direct labour (6,000 × Rs. 4.40) 26,400
Variable overheads (6,000 × Rs. 3) 18,000
Total 1,16,400
Actual Cost
Direct Materials (12,670 × 5.70) 72,219
Direct wages 27,950
Variable overhead incurred 20,475
Total 1,20,644
Total Variance = SC- AC = 1,16,400 –1,20,644 = Rs. 4,244 (A)
Missing Figures
1. Actual Direct Labour Hours (DLH)
We can find out this through Variable overhead efficiency variance of Rs. 1,500 adverse
VOH Efficiency Variance= SR (SH – AH)
1,500 A = 3(6,000 – AH)
-1,500 = 18,000 – 3 AH
3AH = 18,000 + 1,500 = 19,500
AH = 19,500/3 = 6,500 Actual Hours i.e. Actual DLH.
Rs.27,950
2. Actual Labour Rate per hour = = Rs. 4.30
6,500 DLH
Relevant Variances:
1 Material Variances:
(a) MCV = SC – AC = 72,000 – 72,219 = Rs. 219 (A)
(b) MPV = AQ (SR – AR) = 12,670 (6 – 5.70) = Rs. 3,801 (F)
or = 19,000 (6 – 5.70) = Rs. 5,700(F)
(c) MUV = SR (SQ – AQ) = 6 (6,000 × 2 – 12,670)
= 6 (12,000 – 12,670) = Rs. 4,020 (A)
2. Labour Variances:
(a) LCV = SC – AC = 26,400 – 27,950 = Rs. 1,550 (A)
(b) LRV = AHP (SR – AR) = 6,500 (4.40 – 4.30) = Rs. 650 (F)
(c) LEV = SR (SH – AHP) = 4.40 (6,000 – 6,500) = Rs. 2,200 (A)

3. Variable Overhead Variances : (Output Basis)

(a) VOH Variance = SVO – AVO= 18,000 – 20,475 Rs. 2,475 (A)
(b) Efficiency Variance = SR (SQ – AQ) (Note 1)
= 3 (6,500 – 6,000) = Rs. 1,500 (A)
(c) Expenditure Variance = (SVOSP – AVO) (Note 2)
= (19,500 – 20,475) = Rs. 975 (A)
Note :
1. One unit of production in one hour. For 6 ,500 DLH, 6,500 units should have been produced (SQ).
But AQ = 6 ,000 units. i.e. less than SQ. Hence, it is adverse variance of Rs. 1 ,500.
2. Standard Variable Overhead on Standard Production = 6,500 × 3 = Rs. 19,500.
Q-14 In a manufacturing company the standard units of production of the year were fixed at 1,20,000 units
and overhead expenditures were estimated to be:
Fixed Rs. 12,00,000; Variable Rs. 6,00,000;
Semi-Variable Rs. 1,80,000
Actual production during the April, 2019 of the year was 8,000 units. Each month has 20 working days.
During the month there was one public holiday. The actual overheads amounted to:
Fixed Rs. 1,10,000; Variable Rs. 48,000
Semi-variable Rs. 19,200
Semi-variable charges are considered to include 60 per cent expenses of fixed nature and 40 per cent
of variable character.
CALCULATE the followings:
(i) Overhead Cost Variance
(ii) Fixed Overhead Cost Variance
(iii) Variable Overhead Cost Variance
(iv) Fixed Overhead Volume Variance
(v) Fixed Overhead Expenditure Variance
(vi) Calendar Variance.
Ans. COMPUTATION OF VARIANCES
(i) Overhead Cost Variance = Absorbed Overheads – Actual Overheads
= (Rs.87,200 + Rs.44,800) – (Rs.1,21,520 + Rs.55,680)
= Rs. 45,200 (A)
(ii) Fixed Overhead Cost = Absorbed Fixed Overheads – Actual Fixed
Overheads Variance = Rs. 87,200 – Rs.1,21,520
= Rs.34,320 (A)
(iii) Variable Overhead Cost = Standard Variable Overheads for Production –
Actual Variance Variable Overheads
= Rs. 44,800 – Rs. 55,680
= Rs. 10,880 (A)

(iv) Fixed Overhead Volume = Absorbed Fixed Overheads – Budgeted Fixed

Variance Overheads
= Rs. 87,200 – Rs.1,09,000
= Rs. 21,800 (A)
(v) Fixed Overhead Expenditure = Budgeted Fixed Overheads – Actual Fixed
Overheads Variance
= Rs.10.90 × 10,000 units – Rs.1,21,520
= Rs.12,520 (A)
(vi) Calendar Variance = Possible Fixed Overheads – Budgeted Fixed
Overheads
= Rs.1,03,550 – Rs.1,09,000
= Rs. 5,450 (A)
WORKING NOTE
Budgeted Fixed Overheads Rs.12,00,000

Fixed Overheads per Unit = = Rs. 10
Budgeted Output 1,20,000units
Fixed Overheads element in Semi-Variable Overheads i.e. 60% of Rs.1,80,000 Rs. 1,08,000
Budgeted Fixed Overheads Rs.1,08,000

Fixed Overheads per Unit = = Rs. 0.90
Standard Rate of Absorption of Fixed Overheads per unit (Rs.10 + Rs.0.90) Rs.10.90
Fixed Overheads Absorbed on 8,000 units @ Rs10.90 Rs. 87,200
Budgeted Variable Overheads Rs. 6,00,000
Add : Variable element in Semi-Variable Overheads 40% of Rs. 1,80,000 Rs. 72,000
Total Budgeted Variable Overheads Rs. 6,72,000
Budgeted Variable Overheads Rs.6,72,000

Standard Variable Cost per unit = = Rs.5.60
Standard Variable Overheads for 8,000 units @ Rs.5.60 Rs. 44,800
Budgeted Annual Fixed Overheads (Rs. 12,00,000 + 60% of Rs. 1,80,000) Rs.13,08,000
Budgeted Fixed Overheads

Possible Fixed Overheads = × Actual Days Rs.1,03,550
Budgeted Days
 Rs. 1,09,000 
 20 Days ×19Days 
 
Actual Fixed Overheads (Rs.1,10,000 + 60% of Rs. 19,200) Rs.1,21,520
Actual Variable Overheads (Rs.48,000 + 40% of Rs.19,200) Rs. 55,680

Q-15 Arnav Ltd. manufactures a product Q, the standard cost of which is as follows:
Standard Cost per unit (Rs.)
Direct Material 600
Direct labour:
- Skilled @ Rs.80 per hour 120
- Unskilled @ Rs.60 per hour 90
Variable overheads 75
Fixed overheads 30
915
During the month just ended 4,000 units of Q were produced. The actual labour cost was as follows.
Rate per hour (Rs.) Cost (Rs.)
Skilled 87.50 5,77,500
Unskilled 55.00 2,97,000
10% of the labour time was lost due to idle time. The standard idle time was 7.5% of labour time. Arnav
Ltd. has budgeted to produce 4,200 units of Q. Arnav Ltd. absorbs its overheads on direct labour hour
(effective hours) basis. Actual fixed and variable overheads incurred were Rs.1,55,000 and Rs.2,85,000
respectively.
CALCULATE:
(i) Labour rate variance;
(ii) Labour efficiency variance;
(iii) Labour mix variance;
(iv) Labour yield variance;
(v) Labour idle time variance;
(vi) Variable overhead expenditure variance and
(vii) Variable overhead efficiency variance.
Ans. Workings:
Skilled Unskilled
Standard Rate per hour 80 60
Standard time for producingone unit 1.5 hours(` 120 ÷ ` 80) 1.5 hours(` 90 ÷ ` 60)
Actual hours paid (AHPaid) 6,600 hours 5,400 hours
Standard hours required toproduce 6,000 hours 6,000 hours
4,000 units (SH) (1.5 hours× 4,000 units) (1.5 hours× 4,000 units)
6, 600 5, 400
Actual hours worked × 97.5 × 97.5
100 100
(AH Worked) = 6,435 hours = 5,265 hours
 6, 600 + 5, 400   6, 600 + 5, 400 

Revised Std. Hours (RSH)  × 97.5  × 0.5  × 97.5  × 0.5
 100   100 
= 5,850 hours = 5,850 hours
Idle timeAbnormal 6,600 - 6,435 = 165 hours 5,400 – 5,265 = 135 hours

(i) Labour Rate Variance = AHPaid(Std. Rate – Actual Rate)

- Skilled = 6,600 hours (` 80 – ` 87.50) = ` 49,500 (A)
- Unskilled = 5,400 hours (` 60 – ` 55) = ` 27,000 (F)
= ` 22,500 (A)
(ii) Labour Efficiency Variance = Std. Rate (SH – AHWorked)
- Skilled = ` 80 (6,000 hours – 6,435 hours) = ` 34,800 (A)
- Unskilled = ` 60 (6,000 hours – 5,265 hours) = ` 44,100 (F)
= ` 9,300 (F)
(iii) Labour Mix Variance = Std. Rate (RSH – AHWorked)
- Skilled = ` 80 (5,850 hours – 6,435 hours) = ` 46,800 (A)
= ` 11,700 (A)
(iv) Labour Yield Variance = Std. Rate (SH – RSH)
- Skilled = ` 80 (6,000 hours – 5,850 hours) = ` 12,000 (F)
= ` 21,000 (F)
(v) Labour Idle time Variance = Std. Rate × Idle timeAbnormal
- Skilled = ` 80 × 165 hours = ` 13,200 (A)
- Unskilled = ` 60 × 135 hours = ` 8,100 (A)
= ` 21,300 (A)
(vi) Variable Overhead Expenditure Variance
= AHWorked (SR - AR)
 ` 75 ` 2,85, 000 
= 11,700 hours =  - 
 2  1.5 hours 11,700hours 
= 11,700 hours (` 25 – ` 24.36) = ` 7,488 (F)
(vii) Variable Overhead Efficiency Variance
= Std. Rate (SH – AHWorked)
= ` 25 (12,000 – 11,700) = ` 7,500 (F)
Q-16 The following information has been provided by a company:
Number of units produced and sold 6,000
Standard labour rate per hour Rs. 8
Standard hours required for 6,000 units -
Actual hours required 17094 hours
Labour efficiency 105.3%
Labour rate variance Rs. 68,376 (A)
(i) Actual labour rate per hour
(ii) Standard hours required for 6,000 units
(iii) Labour Efficiency variance

(iv) Standard labour cost per unit

(v) Actual labour cost per unit.
Ans.
(i) SR – Standard labour Rate per Hour
AR – Actual labour rate per hour
SH – Standard Hours
AH – Actual hours
(i) Labour rate Variance = AH(SR – AR)
= 17094 (8 – AR) = 68,376(A) = - 68,476
= 8 – AR = -4
= AR = Rs. 12
SH
(ii) Labour Efficiency = x100 =105.3
AH
AH× 105.3 17,094 × 105.3

= SH = =
100 100
= 17,999.982
= SH = 18,000 hours
(iii) Labour Efficiency Variance = SR (SH – AH)
= 8(18,000 – 17,094)
= 8 x 906
= Rs. 7,248(F)
18, 000 × 8
(iv) Standard Labour Cost per Unit = = Rs.24
6,000
17, 094 × 12
(v) Actual Labour Cost Per Unit = = = Rs.34.19
6,000
Q-17 Following data is extracted from the books of XYZ Ltd. for the month of January, 2020:
(i) Estimation
Particulars Quantity (kg.) Price (`) Amount (`)
Material - A 800 ? --
Material-B 600 30.00 18,000
--
Normal loss was expected to be 10% of total input materials.
(ii) Actuals-
1480 kg of output produced.
Particulars Quantity (kg.) Price (`) Amount (`)
Material-A 900 ? - -
Material-B ? 32.50 --
59,825

(iii) Other Information

Material Cost Variance = ` 3,625 (F)
Material Price Variance = ` 175 (F)
(i) Standard Price of Material-A;
(ii) Actual Quantity of Material-B;
(iii) Actual Price of Material-A;
(iv) Revised standard quantity of Material-A and Material-B; and
(v) Material Mix Variance;
Ans. (a) (i) Material Cost Variance (A + B) = {(SQ × SP) – (AQ × AP)}
` 3,625 = (SQ × SP) – ` 59,825
(SQ × SP) = ` 63,450
(SQA × SPA) + (SQB × SPB) = ` 63,450
(940 kg × SPA) + (705 kg × ‘ 30) = ` 63,450
(940 kg × SPA) + ` 21,150 = ` 63,450
(940 kg × SPA) = ` 42,300
SPA = Rs.42,300
940kg
Standard Price of Material-A = ` 45
Working Note:
SQ i.e. quantity of inputs to be used to produce actual output
1, 480kg
= = 1,645 kg
90%
800kg
SQA x 1,645kg. = 940 kg
(800 + 600)
600kg
SQB = x 1,645kg. = 705 kg
(800 + 600)
(ii) Material Price Variance (A + B) = {(AQ × SP) – (AQ × AP)}

` 175 = (AQ × SP) – ` 59,825
(AQ × SP) = ` 60,000
(AQA × SPA) + (AQB × SPB) = ` 60,000
(900 kg × ‘ 45 (from (i) above)) + (AQB × `30) = ` 60,000
`40,500 + (AQB × ` 30) = ` 60,000
(AQB × ` 30) = ` 19,500
19, 500
AQB = = 650 kg
30

Actual Quantity of Material B = 650 kg.

(iii) (AQ × AP) = ` 59,825
(AQA × APA) + (AQB × APB) = ` 59,825
(900 kg × APA) + (650 kg (from (ii) above) × ` 32.5) = ` 59,825
(900 kg × APA) + ` 21,125 = ` 59,825
(900 kg × APA) = ` 38,700
38, 700
APA = = 43
900
Actual Price of Material-A = ` 43
(iv) Total Actual Quantity of Material-A and Material-B
= AQA + AQB
= 900 kg + 650 kg (from (ii) above)
= 1,550 kg
Now,
800kg
Revised SQA = x 1,550kg. = 886 kg
(800 + 600)
600kg
Revised SQB = x 1,550kg. = 664 kg
(800 + 600)
(v) Material Mix Variance (A + B) = {(RSQ × SP) – (AQ × SP)}
= {(RSQA × SPA) + (RSQB × SPB) – 60,000}
= (886 kg (from (iv) above) × ` 45 (from (i) above))
+ (664 kg (from (iv) above) × ` 30) - `60,000
= (39,870 + 19,920) – 60,000 = ` 210 (A)
Q-18 Following are the standard cost for a product-X:
(`)
Direct materials 10 kg @ ` 90 per kg 900
Direct labour 8 hours @ `100 per hour 800
Variable Overhead 8 hours @ `15 per hour 120
Fixed Overhead 400
2,220
Budgeted output for the year was 2,000 units. Actual output is 1,800 units.
Actual cost for year is as follows:
(`)
Direct Materials 17,800 Kg @ ` 92 per Kg. 16,37,600
Direct Labour 14,000 hours @ ` 104 per hour 14,56,000
Variable Overhead incurred 2,17,500
Fixed Overhead incurred 7,68,000

(i) Material Usage Variance

(ii) Material Price Variance
(iii) Material Cost Variance
(iv) Labour Efficiency Variance
(v) Labour Rate Variance
(vi) Labour Cost Variance
(vii) Variable Overhead Cost Variance
(viii) Fixed Overhead Cost Variance.
Ans. (i) Material Usage Variance = Std. Price (Std. Quantity – Actual Quantity)
= ` 90 (18,000 kg. – 17,800 kg.)
= ` 18,000 (Favourable)
(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= 17,800 kg. (` 90 – ` 92) = ` 35,600 (Adverse)
(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)
= (18,000 kg. × ` 90) – (17,800 kg. × ` 92)
= ` 16,20,000 – ` 16,37,600
= `17,600 (Adverse)
(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= ` 100 (1,800 units × 8 – 14,000 hrs.)
= ` 100 (14,400 hrs. – 14,000 hrs.)
(v) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 14,000 hrs. (` 100 – `104)
= ` 56,000 (Adverse)
(vi) Labour Cost Variance = Std. Labour Cost – Actual Labour Cost
= (SH × SR) – (AH × AR)
= (14,400 hrs. × ` 100) – (14,000 hrs. × ` 104)
= ` 14,40,000 – ` 14,56,000
= `16,000 (Adverse)
(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost
= (14,400 hrs. × ` 15) – ` 2,17,500
= ` 1,500 (Adverse)
(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed Overhead
= (1,800 units × `400) - ` 7,68,000
= ` 7,20,000 – ` 7,68,000 = ` 48,000 (Adverse)

Q-19 JK Ltd. has furnished the following standard cost data per unit of production:
Material 10 kg @ ` 200 per kg.
Labour 6 hours @ ` 110 per hour
Variable overhead 6 hours @ ` 200 per hour.
Fixed overhead ` 90,00,000 per month (Based on a normal volume of 30,000
labour hours.)
The actual cost data for the month of September 2021 are as follows:
Material used 50,000 kg at a cost of ` 1,05,00,000.
Labour paid ` 31,00,000 for 31,000 hours
Variable overheads ` 58,60,000
Fixed overheads ` 94,00,000
Actual production 4,800 units.
CALCULATE:
(i) Material Cost Variance.
(ii) Labour Cost Variance.
(iii) Fixed Overhead Cost Variance.
(iv) Variable Overhead Cost Variance.
Ans. Budgeted Production 30,000 hours ÷ 6 hours per unit = 5,000 units
Budgeted Fixed Overhead Rate = ` 90,00,000 ÷ 5,000 units = ` 1,800 per unit
= ` 90,00,000 ÷ 30,000 hours = ` 300 per hour.
(i) Material Cost Variance = (Std. Qty. × Std. Price) – (Actual Qty. × Actual Price)
= (4,800 units × 10 kg. × ` 200) - ` 1,05,00,000
= ` 96,00,000 –` 1,05,00,000
= ` 9,00,000 (A)
(ii) Labour Cost Variance = (Std. Hours × Std. Rate) – (Actual Hours × Actual rate)
= (4,800 units × 6 hours × ` 110) – ` 31,00,000
= ` 31,68,000 – ` 31,00,000
= ` 68,000 (F)
(iii) Fixed Overhead Cost Variance = (Budgeted Rate × Actual Qty) – Actual Overhead
= (` 1,800 × 4,800 units) – ` 94,00,000
= ` 7,60,000 (A)
OR = (Budgeted Rate × Std. Hours) – Actual Overhead
= (` 300 × 4,800 units × 6 hours) – ` 94,00,000
= ` 7,60,000 (A)
(iv) Variable Overhead Cost Variance = (Std. Rate × Std. Hours) – Actual Overhead
= (4,800 units × 6 hours × ` 200) - ` 58,60,000
= ` 57,60,000 - ` 58,60,000
= ` 1,00,000 (A)
Q-20 Following information has been provided by a company:
Number of units produced and sold 9,000
Standard labour rate per hour ` 12
Standard hours required for 9,000 units -

Actual hours required 25,641 hours

Labour efficiency 105.3%
Labour rate variance ` 1,53,846 (A)
(i) Actual labour rate per hour
(ii) Standard hours required for 9,000 units
(iii) Labour Efficiency variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit.
Ans. SR - Standard labour Rate per Hour
AR - Actual labour rate per hour
SH - Standard Hours
AH - Actual hours
(i) Labour rate Variance = AH (SR - AR)
- 1,53,846 = 25,641 (12 - AR)
-6 = 12 - AR
AR = ` 18
SH
(ii) Labour Efficiency = x 100 = 105.3
AH
SH =
= SH = 26,999.973
SH = 27,000 hours
(iii) Labour Efficiency Variance = SR (SH - AH)
= 12 (27,000 - 25,641)
= ` 16,308 (F)
27,000  12
(iv) Standard Labour Cost per Unit = = ` 36
9,000
25,641  18
(v) Actual Labour Cost Per Unit = = ` 51.282
2
9,000
Q-21 The standard output of a Product ‘DJ’ is 25 units per hour in manufacturing department of a Company
employing 100 workers. In a 40 hours week, the department produced 960 units of product ‘DJ’ despite
5% of the time paid was lost due to an abnormal reason. The hourly wage rates actually paid were `
6.20, ` 6.00 and ` 5.70 respectively to Group ‘A’ consisting 10 workers, Group ‘B’ consisting 30 workers
and Group ‘C’ consisting 60 workers. The standard wage rate per labour is same for all the workers.
Labour Efficiency Variance is given ` 240 (F).
You are required to compute:
(i) Total Labour Cost Variance.
(ii) Total Labour Rate Variance.
(iii) Total Labour Gang Variance.
(iv) Total Labour Yield Variance, and
(v) Total Labour Idle Time Variance.

Ans. Working Notes:

1. Calculation of Standard Man hours
When 100 workers work for 1 hour, the standard output is 25 units.
Standard man hours per unit = 100 hours / 25 units = 4 hours per unit
2. Calculation of standard man hours for actual output:
= 960 units x 4 hours = 3,840 hours.
3. Calculation of actual cost
Type of No of Actual Rate Amount Idle Hours (5% Actual hours
Workers Workers Hours Paid (`) (`) of hours paid) Worked
Group ‘A’ 10 400 6.2 2,480 20 380
Group ‘B’ 30 1,200 6 7,200 60 1,140
Group ‘C’ 60 2,400 5.7 13,680 120 2,280
100 4,000 23,360 200 3,800
4. Calculation of Standard wage Rate:
Labour Efficiency Variance = 240F
(Standard hours for Actual production – Actual Hours) x SR = 240F
(3,840 – 3,800) x SR = 240
Standard Rate (SR) = ` 6 per hour
= (Standard hours x Standard Rate) – (Actual Hours x Actual rate)
= (3,840 x 6) – 23,360 = 320A
(ii) Total Labour Rate Variance
= (Standard Rate – Actual Rate) x Actual Hours
Group ‘A’ = (6- 6.2) 400 = 80A
Group ‘B’ = (6- 6) 1,200 =0
Group ‘C’ = (6 – 5.7) 2,400 = 720F
640F
(iii) Total Labour Gang Variance
= Total Actual Time Worked (hours) × {Average Standard Rate per hour of Standard Gang -Average
Standard Rate per hour of Actual Gang@}
@ on the basis of hours worked
=0
(iv) Total Labour Yield Variance
= Average Standard Rate per hour of Standard Gang × {Total Standard Time
(hours) - Total Actual Time worked (hours)}
= 6 x (3,840 – 3,800)
= 240F
(v) Total Labour idle time variance
= Total Idle hours x standard rate per hour
= 200 hours x 6
= 1,200A

Q-22 ABC Ltd. has furnished the following information regarding the overheads for the month of June 2020:
(i) Fixed Overhead Cost Variance ` 2,800 (Adverse)
(ii) Fixed Overhead Volume Variance ` 2,000 (Adverse)
(iii) Budgeted Hours for June, 2020 2,400 hours
(iv) Budgeted Overheads for June,2020 ` 12,000
(v) Actual rate of recovery of overheads ` 8 Per Hour
From the above given information
Calculate:
(1) Fixed Overhead Expenditure Variance
(2) Actual Overheads Incurred
(3) Actual Hours for Actual Production
(4) Fixed Overhead Capacity Variance
(5) Standard hours for Actual Production
(6) Fixed Overhead Efficiency Variance
Ans. (1)Fixed Overhead Expenditure Variance
= Budgeted Fixed Overheads – Actual Fixed Overheads
= ` 12,000 – ` 12,800 (as calculated below) = ` 800 (A)
(2) Fixed Overhead Cost Variance= Absorbed Fixed Overheads – Actual Fixed Overheads
2,800 (A) = ` 10,000 – Actual Overheads
Actual Overheads = ` 12,800
(3) Actual Hours for Actual Production = ` 12,800/ `8 = 1,600 hrs.
(4) Fixed Overhead capacity Variance
= Budgeted Fixed Overheads for Actual Hours– Budgeted Fixed Overheads
= ` 5 x 1600 hrs. – ` 12,000 = ` 4,000 (A)
(5) Standard Hours for Actual Production
= Absorbed Overheads/ Std. Rate
= ` 10,000/ ‘ 5 = 2,000 hrs.
(6) Fixed Overhead Efficiency Variance
= Absorbed Fixed Overheads – Budgeted Fixed Overheads for Actual Hours
= ` 10,000 – ` 5 x 1,600 hrs. = ` 2,000 (F)
Working Note:
(i) Fixed Overhead Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed Overheads
2,000 (A) = Absorbed Fixed Overheads – ` 12,000
Absorbed Fixed Overheads = ` 10,000
(ii) Standard Rate/ Hour = ` 5 (` 12,000/2,400 hrs.)
Q-23 Baby Moon Ltd. uses standard costing system in manufacturing one of its product `Baby Cap’. The
details are as follows:
Direct Material 1 Meter @ ` 60 per meter ` 60
Direct Labour 2 hour @ ` 20 per hour ` 40

Variable overhead 2 hour @ ` 10 per hour ` 20

Total ` 120
During the month of August, 10,000 units of `Baby Cap’ were manufactured. Details are as follows:
Direct material consumed 11,400 meters @ ` 58 per meter
Direct labour Hours ? @? ` 4,48,800
Variable overhead incurred ` 2,24,400
Variable overhead efficiency variance is ` 4,000 A. Variable overheads are based on Direct Labour
Hours.
You are required to CALCULATE the following Variances:
(a) Material Variances- Material Cost Variance, Material Price Variance and Material Usage Variance.
(b) Variable Overheads variances- Variable overhead Cost Variance, Variable overhead Efficiency
Variance and Variable overhead Expenditure Variance.
(c) Labour variances- Labour Cost Variance, Labour Rate Variance and Labour Efficiency Variance.
Ans. (i) Material Variances
Budget Std. for actual Actual Amount
Quantity Price Amount Quantity Price Amount Quantity Price
(Meter) (`) (`) (Meter) (`) (`) (Meter) (`) (`)
1 60 60 10,000 60 6,00,000 11,400 58 6,61,200
Material Cost Variance = (SQ × SP – AQ × AP)
= 6,00,000 – 6,61,200 = ` 61,200 (A)
Material Price Variance = (SP – AP) AQ
= (60 - 58) 11,400 = ` 22,800 (F)
Material Usage Variance = (SQ – AQ) SP
= (10,000 – 11,400) 60 = ` 84,000 (A)
(ii) Variable Overheads variances
Variable overhead cost Variance
= Standard variable overhead – Actual Variable Overhead
= (10,000 units × 2 hours × ` 10) – 2,24,400 = ` 24,400 (A)
Variable overhead Efficiency Variance
= (Standard Hours – Actual Hours) × Standard Rate per Hour
Let Actual Hours be `X’, then:
(20,000 – X) × 10 = 4,000 (A)
2,00,000 – 10X = - 4,000
X = 2,04,000 ÷ 10
Therefore, Actual Hours (X) = 20,400
Variable overhead Expenditure Variance
= Variable Overhead at Actual Hours - Actual Variable Overheads
= 20,400 × ` 10 – 2,24,400 = ` 20,400 (A)
(iii) Labour variances
Budget Std. for actual Actual
Hours Rate Amount Hours Rate Amount Hours Rate Amount
(`) (`) (`) (`) (`) (`)
2 20 40 20,000 20 4,00,000 20,400 22* 4,48,800
*Actual Rate = ` 4,48,800 ÷ 20,400 hours = ` 22
Labour Cost Variance = (SH × SR) – (AH × AR)

= 4,00,000 – 4,48,800 = `` 48,800 (A)

Labour Rate Variance = (SR – AR) × AH
= (20 – 22) × 20,400 = ` 40,800 (A)
Labour Efficiency Variance = (SH – AH) × SR
= (20,000 – 20,400) × 20 = ` 8,000 (A)
Q-24 LM Limited produces a product ‘SX4’ which is sold in a 10 Kg. packet. The standard cost card per packet
of ‘SX4’ is as follows:
(`)
Direct materials 10 kg @ ` 90 per kg 900
Direct labour 8 hours @ ` 80 per hour 640
Variable Overhead 8 hours @ ` 20 per hour 160
Fixed Overhead 250
1,950
Budgeted output for a quarter of a year was 10,000 Kg. Actual output is 9,000 Kg.
Actual costs for this quarter are as follows:
(`)
Direct Materials 8,900 Kg @ ` 92 per Kg. 8,18,800
Direct Labour 7,000 hours @ ` 84 per hour 5,88,000
Variable Overhead incurred 1,40,000
Fixed Overhead incurred 2,60,000
(i) Material Usage Variance
(ii) Material Price Variance
(iii) Material Cost Variance
(iv) Labour Efficiency Variance
(v) Labour Rate Variance
(vi) Labour Cost Variance
(vii) Variable Overhead Cost Variance
(viii) Fixed Overhead Cost Variance
Ans.(i) Material Usage Variance = Std. Price (Std. Quantity – Actual Quantity)
= ` 90 (9,000 kg. – 8,900 kg.)
(ii) Material Price Variance = Actual Quantity (Std. Price – Actual Price)
= 8,900 kg. (` 90 – ` 92) = ` 17,800 (Adverse)
(iii) Material Cost Variance = Std. Material Cost – Actual Material Cost
= (SQ × SP) – (AQ × AP)
= (9,000 kg. × ` 90) – (8,900 kg. × ` 92)
= ` 8,10,000 – ` 8,18,800
= ` 8,800 (Adverse)
(iv) Labour Efficiency Variance = Std. Rate (Std. Hours – Actual Hours)
= ` 80 (9,000 /10 x 8 hours – 7,000 hrs.)

= ` 80 (7,200 hrs. – 7,000 hrs.)

(v) Labour Rate Variance = Actual Hours (Std. Rate – Actual Rate)
= 7,000 hrs. (` 80 – ` 84)
= ` 28,000 (Adverse)
(vi) Labour Cost Variance = Std. Labour Cost – Actual Labour Cost
= (SH × SR) – (AH × AR)
= (7,200 hrs. × ` 80) – (7,000 hrs. × ` 84)
= ` 5,76,000 – ` 5,88,000
= ` 12,000 (Adverse)
(vii) Variable Cost Variance = Std. Variable Cost – Actual Variable Cost
= (7,200 hrs. × ` 20) – ` 1,40,000
= ` 4,000 (Adverse)
(viii) Fixed Overhead Cost Variance = Absorbed Fixed Overhead – Actual Fixed Overhead
= 250 /10 kgs. x 9,000 kgs. 2,60,000
= ` 2,25,000 – ` 2,60,000 = ` 35,000 (Adverse)
Q-25 The standard output of a Product ‘D’ is 50 units per hour in manufacturing department of a Company
employing 100 workers. In a 40 hours week, the department produced 1,920 units of product ‘D’ despite
5% of the time paid was lost due to an abnormal reason. The hourly wage rates actually paid were `
12.40, ` 12.00 and ` 11.40 respectively to Group ‘A’ consisting 10 workers, Group ‘B’ consisting 30 workers
and Group ‘C’ consisting 60 workers. The standard wage rate per labour is same for all the workers.
Labour Efficiency Variance is given ` 480 (F).
You are required to COMPUTE:
(i) Total Labour Cost Variance.
(ii) Total Labour Rate Variance.
(iii) Total Labour Gang Variance.
(iv) Total Labour Yield Variance, and
(v) Total Labour Idle Time Variance.
Ans. Working Notes:
1. Calculation of Standard Man hours
When 100 workers work for 1 hour, the standard output is 50 units.
Standard man hours per unit = 100 hours / 50 units = 2 hours per unit
2. Calculation of standard man hours for actual output:
= 1,920units x 2 hours = 3,840 hours.
3. Calculation of actual cost
Type of No of Actual Rate Amount Idle Hours (5% Actual hours
Workers Workers Hours Paid (‘) (‘) of hours paid) Worked
Group ‘A’ 10 400 12.40 4,960 20 380
Group ‘B’ 30 1,200 12 14,400 60 1,140
Group ‘C’ 60 2,400 11.40 27,360 120 2,280
100 4,000 46,720 200 3,800

4. Calculation of Standard wage Rate:

Labour Efficiency Variance = 480F
(Standard hours for Actual production – Actual Hours) x SR = 480F
(3,840 – 3,800) x SR = 480
Standard Rate (SR) = ‘ 12 per hour
= (Standard hours x Standard Rate) – (Actual Hours x Actual rate)
= (3,840 x 12) – 46,720 = 640A
(ii) Total Labour Rate Variance
= (Standard Rate – Actual Rate) x Actual Hours
Group ‘A’ = (12 - 12.40) 400 = 160A
Group ‘B’ = (12 - 12) 1,200 =0
Group ‘C’ = (12 – 11.40) 2,400 = 1,440F
1,280F
(iii) Total Labour Gang Variance
= Total Actual Time Worked (hours) × {Average Standard Rate per hour of Standard Gang -Average
Standard Rate per hour of Actual Gang@}
@ on the basis of hours worked
= 3,800 × (12-3,840×12/3,800)
=0
[Note: As the number of workers in standard and actual is the same, there is no difference in mix ratio,
so labour gang variance will be NIL]
(iv) Total Labour Yield Variance
= Average Standard Rate per hour of Standard Gang × {Total Standard Time (hours) - Total Actual Time
worked (hours)}
= 12 x (3,840 – 3,800)
= 480F
(v) Total Labour idle time variance
= Total Idle hours x standard rate per hour
= 200 hours x 12
= 2,400A
Q-26 In a manufacturing company the standard units of production for the year were fixed at 1,20,000 units
and overhead expenditures were estimated to be as follows:
Fixed 12,00,000
Semi-variable (60% expenses are of fixed nature and 40% are of variable nature) 1,80,000
Variable 6,00,000
Actual production during the month of April, 2021 was 8,000 units. Each month has 20 working days.
During the month there was one public holiday. The actual overheads were as follows:
Fixed 1,10,000
Semi-variable (60% expenses are of fixed nature and 40% are of variable) 19,200
Variable 48,000

You are required to calculate the following variances for the month of April 2021:
i. Overhead Cost variance
ii. Fixed Overhead Cost variance
iii. Variable Overhead Cost variance
iv. Fixed Overhead Volume variance
v. Fixed Overhead Expenditure Variance
vi. Calendar Variance
Ans. Working Notes
Fixed Overheads = ` 10
Fixed Overheads element in Semi-Variable Overheads i.e. 60% of `1,80,000

`1,80,000
Fixed Overheads = ` 0.90
Standard Rate of Absorption of Fixed Overheads per unit (`10 + `0.90) ` 10.90
Fixed Overheads Absorbed on 8,000 units @ ` 10.90 ` 87,200
Budgeted Variable Overheads ` 6,00,000
Add: Variable element in Semi-Variable Overheads 40% of ` 1,80,000 ` 72,000
Total Budgeted Variable Overheads ` 6,72,000
Standard Variable Cost per unit = = `5.60
Standard Variable Overheads for 8,000 units @ `5.60 ` 44,800

Budgeted Annual Fixed Overheads (` 12,00,000 + 60% of ` 1,80,000) ` 13,08,000
Possible Fixed Overheads = ` 1,03,550
Actual Fixed Overheads (`1,10,000 + 60% of ` 19,200) ` 1,21,520

Actual Variable Overheads (`48,000 + 40% of `19,200) ` 55,680
COMPUTATION OF VARIANCES
i. Overhead Cost Variance = Absorbed Overheads – Actual Overheads
= (` 87,200 + ` 44,800) – (` 1,21,520 + ` 55,680)
= ` 45,200 (A)
ii. Fixed Overhead Cost Variance = Absorbed Fixed Overheads – Actual Fixed Overheads
= ` 87,200 – ` 1,21,520

= ` 34,320 (A)
iii. Variable Overhead Cost Variance = Standard Variable Overheads for Production–
Actual Variable Overheads
= ` 44,800 – ` 55,680
= ` 10,880 (A)
iv. Fixed Overhead Volume Variance = Absorbed Fixed Overheads – Budgeted Fixed Overheads
= ` 87,200 – `1,09,000
= ` 21,800 (A)
v. Fixed Overhead Expenditure Variance = Budgeted Fixed Overheads – Actual Fixed Overheads
= ` 10.90 × 10,000 units – ` 1,21,520
= ` 12,520 (A)
vi. Calendar Variance = Possible Fixed Overheads – Budgeted Fixed Overheads
= ` 1,03,550 – ` 1,09,000
= ` 5,450 (A)
OR
Calendar Variance = (Actual days – Budgeted days) x Standard fixed overhead rate per day
Standard fixed overhead rate per day = 1308000/20*12 = ` 5450
Fixed Overhead Calendar Variance = (19-20) x 5450 = 5450(A)
Q-27 Rounak Minerals Ltd. operates in iron ore mining through open cast mining method. Explosives and
detonators are used for excavation of iron ores from the mines. The following are the details of standard
quantity of explosives materials used for mining:
Particulars Rate (`) Standard Qty. for Standard Qty. for
Iron ore Overburden (OB)
SME 40.00 per kg. 2.4 kg per tonne 1.9 kg per cubic- meter
Detonators 20.00 per piece 2 pcs per tonne 2 pcs per cubic-meter
The standard stripping ratio is 3:1 (means 3 cubic- meter of overburden soil to be removed to get one
tonne of iron ore).
During the month of December 2021, the company produced 20,000 tonnes of iron ore and removed
58,000 cubic- meter of OB. The quantity of explosive materials used and paid for the month is as below:
Material Quantity Amount (`)
SME 1,67,200 kg. 63,53,600
Detonators 1,18,400 pcs 24,27,200
You are required to COMPUTE:
(i) Material price variance
(ii) Material quantity variance
(iii) Material cost variance.

Ans.
Workings:
1. Calculation of Standard Qty. of Explosives and Detonators for actual output:
Particulars Iron ore Overburden (OB) Total
SME:
A Actual Output 20,000 tonne 58,000 M3
B Standard Qty per unit 2.4 kg./tonne 1.9 kg./M3
C Standard Qty. for actual
production [A×B] 48,000 kg. 1,10,200 kg. 1,58,200 kg.
Detonators:
D Standard Qty per unit 2 pcs/ tonne 2 pcs/ M3
E Standard Qty. for actual
production [A×D] 40,000 pcs. 1,16,000 pcs 1,56,000 pcs
2. Calculation of Actual Price per unit of materials:
Material Quantity [A] Amount (`) [B] Rate (`) [C = B÷A]
SME 1,67,200 kg. 63,53,600 38.00
Detonators 1,18,400 pcs 24,27,200 20.50
(i) Computation of material price variance:
Material Price Variance = Actual Qty. × (Std. Price - Actual Price)
SME = 1,67,200 kg. × (`40 – `38) = ` 3,34,400 (F)
Detonators = 1,18,400 pcs × (`20 – `20.5) = ` 59,200 (A)
Total = ` 2,75,200 (F)
(ii) Computation of material quantity variance:
Material Qty. Variance = Std. Price × (Std. Qty for actual output - Actual Qty.)
SME = `40 × (1,58,200 kg. - 1,67,200 kg.) = ` 3,60,000 (A)
Detonators = `20 × (1,56,000 pcs -1,18,400 pcs) = ` 7,52,000 (F)
Total = ` 3,92,000 (F)
(iii) Computation of material cost variance:
Material cost variance = Std. cost – Actual Cost
Or, (Std. Price × Std. Qty) – (Actual Price × Actual Qty.)
SME = (`40 × 1,58,200 kg) – (`38 × 1,67,200 kg.)
= `63,28,000 – `63,53,600 = ` 25,600 (A)
Detonators = (`20 × 1,56,000 pcs) – (`20.50 × 1,18,400 pcs)
= `31,20,000 – `24,27,200 = ` 6,92,800 (F)
Total = ` 6,67,200 (F)

Q-28 Following are the details given:

Budgeted Days 25
Budgeted Fixed Overheads 1,00,000
Budgeted Production 800 units per day
Actual Production 21,000 units
Fixed Overheads are absorbed @ ‘ 10 per hour.
Fixed overheads efficiency variance 10,000A
Fixed overheads calendar variance 8,000F
Fixed overheads cost variance 15,000A
(a) Actual Fixed Overheads
(b) Actual Days
(c) Actual Hours
(d) Fixed overheads Expenditure variance
(e) Fixed overheads volume variance
(f) Fixed overheads capacity variance [March 22]
Ans. (i) Fixed Overhead Cost Variance = (Std Fixed Overheads – Actual Fixed Overheads)
= (1,05,000 - Actual Fixed Overheads) = 15,000A

=> Actual Fixed Overheads = 1,20,000
(ii) Fixed Overhead Calendar Variance=(Actual Days – Budgeted Days) x Budgeted rate per day
= (Actual Days - 25)× 1,00,000/25 = 8,000F
= (Actual Days - 25) = 2
=> Actual Days = 27
(iii) Fixed Overhead Efficiency Variance =(Standard Hours for Actual Production – Actual Hours)
x Budgeted rate per hour
= (10,500 – Actual Hours) = -1,000

=> Actual Hours = 11,500
(iv) Fixed overheads Expenditure variance=(Budgeted Fixed Overheads – Actual Fixed Overheads)
= (1,00,000 – 1,20,000) = 20,000A
(v) Fixed overheads volume variance = (Budgeted units – Actual Units ) x Budgeted Rate per unit
(vi) Fixed overheads capacity variance = (Budgeted Hours for Actual Days – Actual Hours)
x Budgeted Rate per Hour
---0---0---

CHAPTER - 14
MARGINAL COSTING
Q-1 A Ltd. manufacture and sales its product R-9. The following figures have been collected from cost
records of last year for the product R-9:
Elements of Cost Variable Cost portion Fixed Cost
Direct Material 30% of Cost of Goods Sold —
Direct Labour 15% of Cost of Goods Sold —
Factory Overhead 10% of Cost of Goods Sold ` 2,30,000
Administration Overhead 2% of Cost of Goods Sold ` 71,000
Selling & Distribution Overhead 4% of Cost of Sales ` 68,000
Last Year 5,000 units were sold at ` 185 per unit. From the given DETERMINE the followings:
(i) Break-even Sales (in rupees)
(ii) Profit earned during last year
(iii) Margin of safety (in %)
(iv) Profit if the sales were 10% less than the actual sales.
(Assume that Administration Overhead is related with production activity)
Ans. Working Notes:
(1) Calculation of Cost of Goods Sold (COGS):
COGS = DM + DL + FOH + AOH
COGS = {0.3 COGS + 0.15 COGS + (0.10 COGS + ` 2,30,000) + (0.02 COGS + ` 71,000)}
Or, COGS = 0.57 COGS + ` 3,01,000
` 3,01,000
Or, COGS = =`7,00,000
0.43
(2) Calculation of Cost of Sales (COS):
COS = COGS + S&DOH
COS = COGS + (0.04 COS + ` 68,000)
Or, COS = `7,00,000 + (0.04 COS + ` 68,000)
` 7,68,000
Or, COS = = ` 8,00,000
0.96

(3) Calculation of Variable Costs:

Direct Material- (0.30 × ` 7,00,000) ` 2,10,000
Direct Labour- (0.15 × ` 7,00,000) ` 1,05,000
Factory Overhead- (0.10 × ` 7,00,000) ` 70,000
Administration OH- (0.02 × ` 7,00,000) ` 14,000
Selling & Distribution OH (0.04 × ` 8,00,000) ` 32,000
` 4,31,000
(4) Calculation of total Fixed Costs:
Factory Overhead- ` 2,30,000
Administration OH- ` 71,000
Selling & Distribution OH ` 68,000
` 3,69,000
(5) Calculation of P/V Ratio:
Contribution Sales - Variable Costs

P/V Ratio = ×100 = ×100
Sales Sales
 ` 185× 5,000 units  - ` 4,31,000

×100 = 53.41%
` 185× 5,000 units
(i) Break-Even Sales
Fixed Costs ` 3,69,000

= = ` 6.90,882
P/V Ratio 53.41%
(ii) Profit earned during the last year
= (Sales – Total Variable Costs) – Total Fixed Costs
= (` 9,25,000 - ` 4,31,000) - ` 3,69,000
= ` 1,25,000
(iii) Margin of Safety (%)
Sales Breakeven sales

= ×100
Sales
` 9.25,000 - 6,90,882
= ×100 = 25.31%
` 9,25,000
(iv) Profit if the sales were 10% less than the actual sales:
Profit = 90% (` 9,25,000 - ` 4,31,000) - ` 3,69,000
= ` 4,44,600 - ` 3,69,000 = ` 75,600
Q-2 PVC Ltd sold 55,000 units of its product at `375 per unit. Variable costs are `175 per unit (manufacturing
costs of `140 and selling cost `35 per unit). Fixed costs are incurred uniformly throughout the year and
amount to `65,00,000 (including depreciation of `15,00,000). There is no beginning or ending
inventories.
-464- Chapter-14 : Marginal Costing

Required:
(i) Compute breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Compute the P/V ratio.
(iii) Compute the number of units that must be sold to earn an income (EBIT) of `5,00,000.
(iv) Compute the sales level achieve an after-tax income (PAT) of `5,00,000, assume 40% corporate
tax rate.
Ans. (i) Contribution = `375 - `175 = `200 per unit.
Fixed cost ` 65,00,000

Break even Sales Quantity = = = 32,500 units
Contribution margin per unit ` 200
Cash Fixed Cost ` 50,00,000

Cash Break even Sales Qty = = = 25,000 units
Contribution margin per unit ` 200
Contribution/ unit ` 200

(ii) P/V ratio = ×100 = ×100 = 53.33%
Selling Pr ice / unit ` 375
(iii) No. of units that must be sold to earn an Income (EBIT) of ‘5,00,000
Fixed cost Desired EBIT level 65,00,000 + 5,00,000
= = 35,000 units
Contribution margin per unit 200
(iv) After Tax Income (PAT) = ` 5,00,000
Tax rate = 40%
` 5,00,000
Desired level of Profit before tax = ×100 = ` 8,33,333
60
Fixed Cost + Desired Profit
Estimate Sales Level =
P/V ratio
 Fixed Cost Desired Profit 

Or,  × Selling Priceper unit 
 Contribution per unit 
` 65,00,000 + ` 8,33,333
= ` 1,37,50,859
53.33%
Q-3 MNP Ltd sold 2,75,000 units of its product at ` 375 per unit. Variable costs are ` 175 per unit (manufacturing
costs of `140 and selling cost `35 per unit). Fixed costs are incurred uniformly throughout the year and
amount to `3,50,00,000 (including depreciation of ` 1,50,00,000). there are no beginning or ending
inventories.
Required:
(i) Compute breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Compute the P/V ratio.
(iii) Compute the number of units that must be sold to earn an income (EBIT) of ` 25,00,000.
(iv) Compute the sales level achieve an after-tax income (PAT) of ` 25,00,000. Assume 40% corporate
Income Tax rate.

Ans. (i) Contribution = `375 - `175 = `200 per unit.

Fixed Cost ` 3,50,000
Break even Sales Quantity = = = 1,75,000 units
Cash Fixed Cost ` 2,00,000
Cash Break even Sales Qty= = = 1,00,000 units
Contribution / unit ` 200
(ii) P/V ratio = x 100  100 = 53.33%
Selling Price / unit ` 375
(iii) No. of units that must be sold to earn an Income (EBIT) of ` 25,00,000
Fixed Cost + Desired EBIT level 3,50,00,000 + 25,00,000
= = 1,87,500 units
(iv) After Tax Income (PAT) = `25,00,000
Tax rate = 40%
25,00,000
Desired level of Profit before tax =  100 = `41,66,667
60
Fixed Cost + Desired Profit
Estimate Sales Level =
P / V ratio
 Fixed Cost + Desired Profit 

Or,   Selling Price perunit 
 Contribution per unit 
`3,50,00,000 + ` 41,66,667
= = `7,34,42,091
53.33%
Q-4 A company sells its product at ` 15 per unit. In a period, if it produces and sells 8,000 units, it incurs a
loss of ` 5 per unit. If the volume is raised to 20,000 units, it earns a profit of ` 4 per unit. Calculate
break-even point both in terms of rupees as well as in units.
Ans. We know that S – V = F + P (S - Sales, V - Variable cost, F - Fixed cost and P - Profit/loss)
 Suppose variable cost = x per unit
Fixed Cost = y
When sales is 8,000 units, then
15 x 8,000 - 8,000 x = y - 40,000.................... (1)
When sales volume raised to 20,000 units, then
15 x 20,000 - 20,000 x = y + 80,000.............. (2)
Or, 1,20,000 – 8,000 x = y – 40,000.............. (3)
And 3,00,000 – 20,000 x = y + 80,000.............. (4)
From (3) & (4) we get x = ` 5.
Variable cost per unit = ` 5
Putting this value in 3rd equation:
1,20,000 – (8,000 x 5) = y 40,000
or y = ` 1,20,000
Fixed Cost = ` 1,20,000

S - V 15 - 5 200 2
P/V ratio = =  100 = = 66 %
S 15 3 3
Suppose break-even sales = x
15x – 5x = 1,20,000 (at BEP, contribution will be equal to fixed cost)
x = 12,000 units.
Or Break-even sales in units = 12,000
Break-even sales in rupees = 12,000 x ` 15 = ` 1,80,000
Q-5 A company manufactures two types of herbal product, A and B. Its budget shows profit figures after
apportioning the fixed joint cost of `15 lacs in the proportion of the numbers of units sold. The budget
for 2018, indicates:
A B
Profit (`) 1,50,000 30,000
Selling Price / unit (`) 200 120
P/V Ratio (%) 40 50
Required:
Compute the best option among the following, if the company expects that the number of units to be sold
would be equal.
(i) Due to exchange in a manufacturing process, the joint fixed cost would be reduced by 15% and the
variables would be increased by 7½ %.
(ii) Price of A could be increased by 20% as it is expected that the price elasticity of demand would be unity
over the range of price.
(iii) Simultaneous introduction of both the option, viz, (i) and (ii) above.
Ans. Option (i)
Increase in profit when due to change in a manufacturing process there is reduction in joint fixed cost
and increase in variable costs.
(` )
Revised Contribution from 12,000 units of A due to 7.5% increase in
Variable Cost {12,000 units × (`200 – `129)} 8,52,000
Revised Contribution from 12,000 units of B due to 7.5% increase in
Variable Cost {12,000 units × (`120 – `64.50)} 6,66,000
Total Revised Contribution 15,18,000
Less: Fixed Cost (`15,00,000 – 15% × `15,00,000) 12,75,000
Revised Profit 2,43,000
Less: Existing Profit 1,80,000
Increase in Profit 63,000
Option (ii)
Increase in profit when the price of product A increased by 20% and the price elasticity of its demand would
be unity over the range of price.

(` )
Budgeted Revenue from Product A (12,000 units × `200) 24,00,000
Revised Demand (in units) (`24,00,000 / `240) 10,000
Revised Contribution (in `) [10,000 units × ( `240 – `120)] 12,00,000
Less: Existing Contribution (12,000 units × `80) 9,60,000
Increase in Profit (Contribution) 2,40,000
*Note: Since Price Elasticity of Demand is 1, therefore the Revenue in respect of Products will remain same.
Option (iii)
Increase in profit on the simultaneous introduction of above two options.
(`)
Revised Contribution from Product A [10,000 units × (`240 – `129)] 11,10,000
Revised Contribution from Product B [12,000 units × (`120 – `64.50)] 6,66,000
Total Revised Contribution 17,76,000
Less: Revised Fixed Cost 12,75,000
Revised Profit 5,01,000
Less: Existing Profit 1,80,000
Increase in Profit 3,21,000
A comparison of increase in profit figures under above three options clearly indicates that the option (iii) is
the best as it increases the profit of the concern by ` 3,21,000.
Note: The budgeted profit / (loss) for 201 8 in respect of products A and B should be ` 2,10,000 and (`30,000)
respectively instead of ` 1,50,000 and ` 30,000.
Workings
1. Contribution per unit of each product:
Product
A (`) B (`)
Contribution per unit 80 60
(Sales × P/V Ratio) (`200 × 40%) (`120 × 50%)
2. Number of units to be sold:
Total Contribution – Fixed Cost = Profit
Let x be the number of units of each product sold, therefore:
(80x + 60x) – `15,00,000 = `1,50,000 + `30,000
Or x = 12,000 units
Q-6 When volume is 4000 units, average cost is ? 3.75 per unit. When volume is 5000 units, average cost is
` 3.50 per unit. The Break-Even point is 6000 units.
Calculate:- (i) Variable Cost per unit (ii) Fixed Cost and (iii) Profit Volume Ratio.
Change in Total cost

Ans. (i) Variable cost per unit =
Change in units
( ` 3.50 5,000 units) ( ` 3.75 4,000 units)

=
5,000 - 4,000
468- Chapter-14 : Marginal Costing

` 17,500 - ` 15,000
= = ` 2,500/1000 = ` 2.5
1,000
(ii) Fixed cost = Total Cost – Variable cost (at 5,000 units level)
= ` 17,500 – ` 2.5 × 5,000 = ` 5,000
(iii) Contribution
Fixed cost ` 5,000

per unit = = = 0.833
BEP (in units) 6,000 units
Contributionper unit 0.833

P/V Ratio = = = 25%
Salepriceper unit 2.5 + 0.833
Q-7 PJ Ltd manufactures hockey sticks. It sells the products at ` 500 each and makes a profit of ` 125 on each
stick. The Company is producing 5000 sticks annually by using 50% of its machinery capacity.
The cost of each stick is as under:
Direct Material ` 150
Direct Wages ` 50
Works Overhead ` 125 (50% fixed)
Selling Expenses ` 150 (25% variable)
The anticipation for the next year is that cost will go up as under:
Fixed Charges : 10%
Direct Wages 20%
Direct Material 5%
There will not be any change in selling price.
There is an additional order for 2000 sticks in the next year.
Calculate the lowest price that can be quoted so that the Company can earn the same profit as it earned
in the current year ?
Ans. Selling Price = `500
Profit = ` 125
No of Sticks = 5,000
Particular Current Year (`) Next Year (`)
Direct Material 150 157.50
(150 + 5%)
Direct Wages 50 60
(50+20%)
Works Overheads 62.50 62.5
(125 × 50%)
Selling Expenses 12.50 12.5
(50 × 25%)
Total Variable Cost 275 292.50
Fixed Cost (62.5 × 5,000) = 3,12,500; (37.5 × 5,000) = 1,87,500 5,00,000 5,50,000

Let: Lowest Price Quoted = K

Now, Sales = Target Profit (5,000 units × ` 125) + Variable Cost + Fixed Cost
Or, = (5,000 × 500) + (2,000 × K) = 6,25,000 + 20,47,500 + 5,50,000
Or, K = ` 361.25
So, Lowest Price that can be quoted to earn the profit of ` 6,25,000 (same as current year) is ` 361.25
Q-8 M/s Gaurav Private Limited is manufacturing and selling two products:’BLACK’ and ‘WHITE’ at selling
price of ` 20 and ` 30 respectively.The following sales strategy has been outlined for the financial year
2019-20:
(i) Sales planned for the year will be ` 81,00,000 in the case of ‘BLACK’ and ` 54,00,000 in the case of
‘WHITE’.
(ii) The selling price of ‘BLACK’ will be reduced by 10% and that of ‘WHITE’ by 20%.
(iii) Break-even is planned at 70% of the total sales of each product.
(iv) Profit for the year to be maintained at ` 8,26,200 in the case of ‘BLACK’ and ` 7,45,200 in the case
of ‘WHITE’. This would be possible by reducing the present annual fixed cost of ` 42,00,000 allocated
as ` 22,00,000 to ‘BLACK’ and ` 20,00,000 to ‘WHITE’
(1) Number of units to be sold of ‘BLACK’ and ‘WHITE’ to Break even during the financial year 2019-20.
(2) Amount of reduction in fixed cost product-wise to achieve desired profit mentioned at (iv) above.
Ans.
(i) Statement showing Break Even Sales
Particulars Black White
Sales Planned 81,00,000 54,00,000
Selling Price (`) 18 24
Number of Units to be sold 4,50,000 2,25,000
Break Even sales (in Units),70% of total sales 3,15,000 1,57,500
Or
Break Even sales (in `),70% of total sales 56,70,000 37,80,000
(ii) Statement Showing Fixed Cost Reduction
Profit to be maintained (`) 8,26,200 7,45,200
Margin of Safety (70% of Sales) (`) 24,30,000 16,20,000
PVR (Profit/ Margin of Safety) x 100 34% 46%
Contribution (Sales x 34% or 46%) (`) 27,54,000 24,84,000
Less: Profit (`) 8,26,200 7,45,200
Revised Fixed Cost (`) 19,27,800 17,38,800
Present Fixed Cost (`) 22,00,000 20,00,000
Reduction in Fixed Cost 2,72,200 2,61,200
Q-9 What are the limitations of marginal costing?
Ans. Limitations of Marginal Costing
(i) Difficulty in classifying fixed and variable elements: It is difficult to classifyexactly the expenses
into fixed and variable category. Most of the expenses are neither totally variable nor wholly
fixed. For example, various amenities provided to workers may have no relation either to volume
of production or time factor.

(ii) Dependence on key factors: Contribution of a product itself is not a guide foroptimum profitability
unless it is linked with the key factor.
(iii) Scope for Low Profitability: Sales staff may mistake marginal cost for total cost and sell at a price;
which will result in loss or low profits. Hence, sales staff should be cautioned while giving marginal
cost.
(iv) Faulty valuation: Overheads of fixed nature cannot altogether be excluded particularly in large
contracts, while valuing the work-in- progress. In order to show the correct position fixed overheads
have to be included in work-in-progress.
(v) Unpredictable nature of Cost: Some of the assumptions regarding the behaviour of various costs
are not necessarily true in a realistic situation. For example, the assumption that fixed cost will
remain static throughout is not correct. Fixed cost may change from one period to another. For
example, salaries bill may go up because of annual increments or due to change in pay rate etc.
The variable costs do not remain constant per unit of output. There may be changes in the prices
of raw materials, wage rates etc. after a certain level of output has been reached due to shortage
of material, shortage of skilled labour, concessions of bulk purchases etc.
(vi) Marginal costing ignores time factor and investment: The marginal cost of two jobs may be the
same but the time taken for their completion and the cost of machines used may differ. The true
cost of a job which takes longer time and uses costlier machine would be higher. This fact is not
disclosed by marginal costing.
(vii) Understating of W-I-P: Under marginal costing stocks and work in progress are understated.
Q-10 A manufacturing company is producing a product 'A' which is sold in the market at `45 per unit. The
company has the capacity to produce 40000 units per year. The budget for the year 2018-19 projects a
sale of 30000 units.
The costs of each unit are expected as under:
`
Materials 12
Wages 9
Overheads 6
Margin of safety is ` 4,12,500.
(i) calculate fixed cost and break-even point.
(ii) calculate the volume of sales to earn profit of 20% on sales.
(iii) if management is willing to invest ` 10,00,000 with an expected return of 20%, calculate units to
be sold to earn this profit.
(iv) Management expects additional sales if the selling price is reduced to ` 44. Calculate units to be
sold to achieve the same profit as desired in above (iii).
Ans.
Profit
Margin of Safety = = ` 4,12,500
P / V ratio
Profit
= 45 - (2 + 9 + 6) = ` 4,12,500
45

Profit
18 = 4,12,500
45
Profit = 1,65,000 OR P/V = (18/45) x 100 =40%
(i) Fixed Cost
Profit = (Sales × P/V Ratio) – Fixed Cost
 18 
1,65,000 =   30,000 x 45 x  - Fixed Cost
 45 
Or Fixed Cost = 5,40,000 – 1,65,000
= ` 3,75,000
OR
Profit = Contribution – Fixed Cost = ` 5,40,000 - ` 3,75,000 = ` 1,65,000
18
P/V Ratio= = 40%
45
Break-even Point = Total Sales – Margin of Safety
= ` (30,000 × 45) – 4,12,500
= 13,50,000 – 4,12,500 = ` 9,37,500
Or
Fixed Cost 3,75,000 3,75,000

= =
BEP = P / V ratio 18 40% = ` 9,37,500 OR 20833.33 Unitss
45
(ii) Let’s assume, Sales Volume = S unit so total sales value is 45 S and
Contribution is 45 S - 27 S = 18 S
Now, Contribution = Fixed Cost + Desired Profit
18 S = 3,75,000 + 9 S (20% of 45 S)
Or, 9S = 3,75,0000
3,75,000
So, S = Unitss
9
3,75,000 - 45
Volume of sales= = ` 18,75,000 OR 41666.67 Unitss
9
So, ` 18,75,000 sales are required to earn profit on 20% of sales
(iii) Contribution = Fixed Cost + Desired Profit
18S = 3,75,000 + Return on Investment
18S = 3,75,000 + 2,00,000
5,75,000
S = Units = 31,945 Units(approx.)
18

So,31,945 Units to be sold to earn a return of ` 2,00,000.

(iv) Revised Contribution = Fixed Cost + Desired Profit
17S = 3,75.000 + 2,00,000
5,75,000
S = Unitss
17
S = 33,824 units (approx.)
 Additional Sales to be sold to achieve the same profit is 33,824 Units.
Q-11 Following figures have been extracted from the books of M/s. RST Private Limited:
Financial Year Sales (`) Profit/Loss (`)
2016-17 4,00,000 15,000(loss)
2017-18 5,00,000 15,000 (Profit)
(i) Profit Volume Ratio
(ii) Fixed Costs
(iii) Break Even Point
(iv) Sales required to earn a profit of ` 45,000.
(v) Margin of Safety in Financial Year 2017-18.
Ans.
Sales (`) Profit (`)
Year 2016 4,00,000 15,000 (loss)
Year 2017 5,00,000 15,000 (profit)
Difference 1,00,000 30,000
Difference in profit 30,000

(i) P/V Ratio = x 100 = x 100 = 30 %
Difference in sales 1,00,000
(ii) (`)
Contribution in 2016 (4,00,000 x 30%) 1,20,000
Add: Loss 15,000
Fixed Cost* 1,35,000
*Contribution = Fixed cost + Profit
 Fixed cost = Contribution – Profit
Fixed Cost 1,35,000

(iii) Break-even point = = = ` 4,50,000
P / V ratio 30%
(iv) Sales to earn a profit of ` 45,000
Fixed Cost + Desired profit 1,35,000 + 45,000

= ` 6,00,000
P / V ratio 30%
(v) Margin of safety in 2017 –18

Margin of safety = Actual sales – Break-even sales

= 5,00,000 – 4,50,000 = `z 50,000.
Q-12 PH Gems Ltd. is manufacturing readymade suits. It has annual production capacity of 2,000 pieces. The
Cost Accountant has presented following information for the year to the management:
Sales 1,500 pieces @ ` 1,800 per piece 27,00,000
Direct Material 5,94,200
Overheads (40% Fixed) 11,97,000 22,33,800
Net Profit 4,66,300
Evaluate following options:
(i) If selling price is increased by ` 200, the sales will come down to 60% of the total annual capacity.
Should the company increase its selling price?
(ii) The company can earn a profit of 20% on sales if the company provide TIEPIN with ready-made suit.
The cost of each TIEPIN is ` 18. Calculate the sales to earn a profit of 20% on sales.
Ans. (i) Evaluation of Option (i)
Selling Price = ` 1800 + ` 200 = ` 2,000
Sales = 2000 x 60% = 1200 Pieces
(`)
Sales (1,200 pieces @ ` 2,000) 24,00,000
 ` 5,94,200 
Less: Direct Material   1,200  4,75,360
 1,500 units 
 ` 4,42,600 
Direct Labour   1,200  3,54,080
 1,500 units 
 ` 11,97,000 x 60% 
Variable Overhead   1,200  5,74,560
 1,500 units 
Less: Fixed cost (Rs. 11,97,000x40%) 4,78,800
Profit 5,17,200
If price has been increased by 11.11% (increases by 200 on 1,800) sales goes down by 20% (decreased by
300 on 1,500). Change in demand is greater than change in price. Since the variable costs are still same
profit has been arose to ` 5,17,200 in-spite of high elasticity of demand. PH gems would not be able to
sustain this policy on account of change if any in variable costs.
(ii) Evaluation of Option (ii)
(`)
Sales 1,800.00
 ` 5,94,200 
Less: Direct Material   396.13
 1,500 
Cost of Tie PIN 18.00

 ` 4,42,600 
Direct Labour   295.07
 1,500 
 ` 11,97,000  60% 
Variable Overheads   478.80
 1,500 
Contribution 612.00
P/V Ratio (` 612/1800x100) 34.0%
Sales to required earn a profit of 20%
Sales = ` 4,78,800 + 0.20 of Sales
34.00%
Sales = ` 34,20,000 or 1,900 units (` 34,20,000/1800)
To earn profit 20% on sales of readymade suit (along with TIE PIN) company has to sold 1,900 units i.e. 95%
of the full capacity. This sales level of 1,900 units is justified only if variable cost is constant. Any upside in
variable cost would impact profitability, to achieve the desired profitability. Production has to be increased
but the scope is limited to 5% only.
Q-13 Why is ‘Zero Base Budgeting’ (ZBB) considered superior to ‘Traditional Budgeting’? Explain.
Ans. Zero based budgeting is superior to traditional budgeting: Zero based budgeting is superior to traditional
budgeting in the following manner:
• It provides a systematic approach for evaluation of different activities.
• It ensures that the function undertaken are critical for the achievement of the objectives.
• It provides an opportunity for management to allocate resources to various activities after a
thorough – cost benefit analysis.
• It helps in the identification of wasteful expenditure and then their elimination. If facilitates the
close linkage of departmental budgets with corporate objectives.
• It helps in the introduction of a system of Management by Objectives.
Q-14 M Ltd. has an annual fixed cost of Rs. 98,50,000. In the year 20X8-X9, sales amounted to Rs.7,80,60,000
as compared to Rs.5,93,10,000 in the preceding year 20X7-X8. Profit in the year 20X8-X9 is Rs.37,50,000
more than that in 20X7-X8.
Required:
(i) CALCULAT E Break-even sales of the company ;
(ii) DET ERMINE profit/ loss on a forecasted sales volume of Rs.8, 20,00,000.
(iii) If there is a reduction in selling price by 10% in the financial year 20X8-X9 and company desires to
earn the same amount of profit as in 20X7-X8, COMPUT E the required sales amount?
Fiexd cost
Ans. (i) Break-even sales =
P / V Ratio
Change in Profit Rs.37,50, 000

P/V Ratio = x 100, or x 100
Change in Sales Rs.7,80,60,000 - Rs.5,93,10,000
Change in Profit
Or, x 100 or, 20%
Change in Sales

Rs.98, 50, 000

Break-even sales = = Rs, 4,92,50,000
20%
(ii) Profit/ loss = Contribution – Fixed Cost
= Rs.8,20,00,000 × 20% - Rs.98,50,000
= Rs.1,64,00,000 – Rs.98,50,000 = Rs.65,50,000
(iii) To earn same amount of profit in 20X8 -X9 as was in 20X7-X8, it has to earn the same amount of
contribution as in 20X7-X8.
Sales – Variable cost = Contribution equal to 20X7 -X8 contribution
Contribution in 20X7-X8 = Sales in 20X7-X8 × P/V Ratio in 20X7 -X8
= Rs.5,93,10,000 × 20% = Rs.1,18,62,000
Let the number of units to be sold in 20X8 -X9 = X
Sales in 20X8-X9 – Variable cost in 20X8-X9 = Desired Contribution
90 X – 80 X = Rs.1,18,62,000
Or, 10 X = 1,18,62,000
Or, X = 11,86,200 units
T herefore, Sales amount required to earn a profit equals to 20X7 -X8 profit
= Rs. 90 × 11,86,200 units = Rs. 10,67,58,000
Q-15 Yamuna Ltd. manufactures a product, currently utilising 80% capacity with a turnover of Rs.8,00,000 at
Rs.25 per unit. T he cost data are as under:
Material cost Rs.7.50 per unit, Labour cost Rs.6.25 per unit
Semi-variable cost (Including variable cost of Rs.3.75) per unit Rs.1,80,000.
Fixed cost Rs. 90,000 upto 80% level of output, beyond this an additional Rs. 20,000 will be incurred.
Calculate :
(i) Activity level at Break-Even-Point
(ii) Number of units to be sold to earn a net income of 8% of sales
(iii) Activity level needed to earn a profit of Rs. 95,000.
Ans. Working notes:
1. (i) Number of units sold at 80% capacity
Turnover Rs.8,00,000
= = 32,000 units.
Selling price p.u. Rs.25
(ii) Number of units sold at 100% capacity
Rs.32,000 units
x 100 = 40,000 units
80
2. Component of fixed cost included in semi -variable cost of 32,000 units.
Fixed cost = {Total semi-variable cost – Total variable cost }
= Rs.1,80,000 – 32,000 units × Rs.3.75
= Rs.1,80,000 – Rs.1,20,000
= Rs.60,000

3. (i) Total fixed cost at 80% capacity

= Fixed cost + Component of fixed cost included in semi —variable cost
= Rs.90,000 + Rs.60,000 = Rs.1,50,000
(ii) Total fixed cost beyond 80% capacity
= Total fixed cost at 80% capacity + Additional fixed cost to be incurred
= Rs.1,50,000 + Rs.20,000 = Rs.1,70,000
4. Variable cost and contribution per unit
Variable cost per unit = Material cost + Labour cost + Variable cost component in
semi variable cost = Rs.7.50 + Rs.6.25 + Rs.3.75 = Rs.17.50
Contribution per unit = Selling price per unit – Variable cost per unit
= Rs.25 – Rs.17.50 = Rs.7.50
5. Profit at 80% capacity level
= Sales revenue – Variable cost – Fixed cost
= Rs.8,00,000 – Rs.5,60,000 (32,000 units × Rs.17.50) – Rs.1,50,000
= Rs.90,000
(i) Activity level at Break–Even Point
Fixed cost Rs. 1,50,000

Break-even point (units) = = = 20,000 unitss
Contribution per unit Rs. 7.50
(Refer to working notes 3 & 4)
Activity level at BEP = Break - Even point (units) × 100
No. of units at 100% capacity level
(Refer to working note 1(ii))
20,000 units
= × 100 = 50%
40,000 units
(ii) Number of units to be sold to earn a net income of 8% of sales
Let S be the number of units sold to earn a net income of 8% of sales.
Mathematically it means that : (Sales revenue of S units)
= Variable cost of S units + Fixed cost + Net income
8
Or, Rs.25S = Rs.17.5S + Rs.1,50,000 + × (Rs.25S)
100
Or, Rs.25S = Rs.17.5S + Rs.1,50,000 + Rs.2S
Or, S = (Rs.1,50,000/Rs.5.5) units
Or, S = 27,273 units.
(iii) Activity level needed to earn a profit of Rs. 95,000
The profit at 80% capacity level, is Rs. 90,000 which is less than the desired profit of Rs. 95,000, therefore
the needed activity level would be more than 80%. Thus the fixed cost to be taken to determine the
activity level needed should be Rs.1,70,000 (Refer to Working Note 3 (ii))
Units to be sold to earn a profit of Rs.95,000

= Fixed cost + Desired profit

Contribution per unit
= Rs. 1,70, 000 + Rs. 95, 000 / Rs. 7.5
= 35,333.33 units
Activity level needed to earn a profit of Rs.95,000
= 35,333.33 units / 40,000 units × 100 = 88.33%
Q-16 EXPLAIN the di fference between product cost and period cost.
Ans. Product costs are those costs that are identified with the goods purchased or produced for resale. In a
manufac turing organisation they are attached to the product and that are included in the inventory
valuation for finished goods, or for incomplete goods. Product cost is also known as inventoriable cost.
Under absorption costing method it includes direct material, direct labour, direct expenses, directly
attributable costs (variable and non -variable) and other production (manufacturing) overheads. Under
marginal costing method Product Costs includes all variable production costs and the all fixed costs are
deducte d from the contribution.
Periods costs are the costs, which are not assigned to the products but are charged as expense against
revenue of the period in which they are incurred. General Administration, marketing, sales and
distributor overheads are recognized as period costs.
Q-17 SK Ltd. engaged in the manufacture of tyres. Analysis of income statement indicated a profit of `150
lakhs on a sales volume of 50,000 units. The fixed cost is ` 850 lakhs which appears to be high. Existing
selling price is ` 3,400 per unit. The company is considering to revise the profit target to ` 350 lakhs. You
are required to COMPUTE -
(i) Break-even point at existing levels in units and in rupees.
(ii) The number of units required to be sold to earn the target profit.
(iii) Profit with 15% increase in selling price and drop in sales volume by 10%.
(iv) Volume to be achieved to earn target profit at the revised selling price as calculated in (ii) above,
if a reduction of 8% in the variable costs and ` 85 lakhs in the fixed cost is envisaged.
Ans. Sales Volume 50,000 Units
Computation of existing contribution
Particulars Per unit (`) Total (` in lakhs)
Sales 3,400 1,700
Fixed Cost 1,700 850
Profit 300 150
Contribution 2,000 1,000
Variable Cost 1,400 700
Fixed Cost 8,50,00,000

(i) Break even sales in units = = = 42,500 units
Contribution per unit 2,000
Break even sales in rupees = 42,500 units x ` 3,400 = ` 1,445 lakhs
OR
2,000
P/V Ratio = x 100 = 58.82%
3,400

Fixed Cost 8,50,00,000

B.E.P (in rupees) = = = ` 1,445 lakhs (approx.)
P / V Ratio 58.82%
(ii) Number of units sold to achieve a target profit of ` 350 lakhs:
Desired Contribution = Fixed Cost + Target Profit
= 850 lakhs + 350 lakhs
= 1,200 lakhs
Desired Contribution 12,00,00,000

Number of units to be sold = = = 60,000 units
Contribution per unit 2,000
(iii) Profit if selling price is increased by 15% and sales volume drops by 10%
Existing Selling Price per unit = ` 3,400
Revised selling price per unit = ` 3,400 × 115% = ` 3,910
Existing Sales Volume = 50,000 units
Revised sales volume = 50,000 units – 10% of 50,000 = 45,000 units.
Statement of profit at sales volume of 45,000 units @ ` 3,910 per unit
Particulars Per unit (`) Total (` in lakhs)
Sales 3,910.00 1,759.50
Less: Variable Costs (1,400.00) (630.00)
Contribution 2,510.00 1,129.50
Less: Fixed Cost (850.00)
Profit 279.50
(iv) Volume to be achieved to earn target profit of ` 350 lakhs with revised selling price and reduction of
8% in variable costs and ` 85 lakhs in fixed cost.
Revised selling price per unit = ` 3,910
Variable costs per unit existing = ` 1,400
Revised Variable Costs
Reduction of 8% in variable costs = ` 1,400 – 8% of 1,400
= ` 1,400 – ` 112
= ` 1,288
Total Fixed Cost (existing) = ` 850 lakhs
Reduction in fixed cost = ` 85 lakhs
Revised fixed cost = ` 850 lakhs – ` 85 lakhs = ` 765 lakhs
Revised Contribution (unit) = Revised selling price per unit – Revised
Variable Costs per units
Revised Contribution per unit = ` 3,910 – ` 1,288 = ` 2,622
Desired Contribution = Revised Fixed Cost + Target Profit
= ` 765 lakhs + `350 lakhs= `1,115 lakhs
` 1,115 lakh
No. of units to be sold = Desired Contribution = ` 2,622 = 42,525 units

Q-18
Fixed Cost Rs. 1,20,000
Variable costs Rs. 3 per unit
Selling price Rs. 7 per unit
Output Rs. 50,000 units
CALCULATE the profit for each of the following situation with the above data:
(i) with the data above
(ii) with a 10% increase in output & sales.
(iii) with a 10% increase in fixed costs.
(iv) with a 10% increase in variable costs.
(v) with a 10% increase in selling price.
(vi) taking all the above situations.
Ans. (i)
Rs.
Sales 50,000 units at Rs. 7 3,50,000
Variable cost 50,000 × 3 1,50,000
Contribution 50,000 × 4 2,00,000
Fixed costs 1,20,000
Profit 80,000
S- V 7-3 4
P/V ratio = ×100 = × 100 = × 100 = 57.14%
S 7 7
F 1,20,000
BEP (units) = = =30,000 Unitss
contribution per unit 4
BEP (Value) = 30,000 Units × 7 = Rs. 2,10,000
Profit Rs. 80,000 (as calculated above)
(ii) with a 10% increase in output & sales
i.e., 50,000+ 5,000 = 55,000 units
Contribution 55,000 × Rs. 4 per unit Rs. 2,20,000
Fixed costs Rs. 1,20,000
Profit Rs. 1,00,000
(iii) with a 10% increase in Fixed Cost
Contribution (50,000 ×Rs. 4 per unit) Rs. 2,00,000
Fixed cost (1,20,000+ 12,000 ) Rs. 1,32,000
Profit Rs. 68,000
(iv) with a 10% increase in variable costs
Selling price per unit 7.00
Less: variable cost (3+0.30) 3.30
Contribution per unit 3.70
Total contribution 50,000 × 3.70 1,85,000
Profit 65,000

(v) with a 10% increase in selling price

Selling price per unit (7.00+0.70) 7.70
Variable cost per unit 3.00
Contribution per unit 4.70
Total contribution 50,000 × Rs. 4.70 2,35,000
Profit 1,15,000
(vi) Effect of all the four above:-
Sales 55,000 × Rs. 7.70 per unit Rs. 4,23,500
Variable cost 55,000 × 3.30 Rs. 1,81,500
Contribution 55,000 × 4.40 Rs. 2,42,000
Fixed cost 1,20,000+ 12,000 Rs. 1,32,000
Profit Rs. 1,10,000
Note: It is assumed that the increase d output of 55,000 units has been sold.
Q-19 C.T. Ltd. manufactures and sells a single product X whose selling price is Rs. 100 per unit and the
variable cost is Rs. 60 per unit.
(i) If the Fixed Costs for this year are Rs. 24,00,000 and the annual sales are at 60% margin of safety,
CALCULATE the rate of net return on sales, assuming an income tax level of 40%.
(ii) For the next year, it is proposed to add another product line Y whose selling price would be Rs. 150
per unit and the variable cost Rs. 100 per unit. The total fixed costs are estimated at Rs. 28,00,000.
The sales mix of X : Y would be 5 : 3. COMPUTE the break- even sales in units for both the products.
Ans. (i) Contribution per unit = Selling price – Variable cost
= Rs.100 – Rs.60
= Rs.40
Break-even Point = 60,000 units
Actual Sales - Break - even Sales
Percentage Margin of Safety =
Actual Sales
Actual Sales - 60,000 units
Or, 60% =
Actual Sales
Actual Sales = 1,50,000 units
(Rs.)
Sales Value (1,50,000 units × Rs.100) 1,50,00,000
Less: Variable Cost (1,50,000 units ×Rs.60) 90,00,000
Less: Fixed Cost 24,00,000
Profit 36,00,000
Less: Income Tax @ 40% 14,40,000
Net Return 21,60,000
 Rs.21,60,000 
Rate of Net Return on Sales = 14.40%  ×100 
 Rs.1,50,00,000 

(ii) Products
X (Rs.) Y (Rs.)
Variable Cost per unit 60 100
Contribution per unit 40 50
Composite contribution will be as follows:
 40   50 
Contribution per unit =  × 5  +  × 3 
 8   8 
= 25 + 18.75 = Rs.43.75
 Rs.28,00,000 
Break-even Sale = 64,000 units  
 Rs.43.75 
Break-even Sales Mix:
X (64,000 units × 5/8) = 40,000 units
Y (64,000 units × 3/8) = 24,000 units
Q-20 Arnav Ltd. is producing a single product, has the profit-volume ratio of 40%. The company wishes to
increase the selling price by 10% which will increase the variable cost by 5%. The fixed overheads will
increase from its present level of Rs.20,00,000 to Rs.30,00,000.
Required:
(i) Compute the company’s original break-even point sales and the break-even point sales after the
increase.
(ii) Estimate the sales value for the firm to make a profit of Rs. 4,50,000 after the increase.
Ans. Workings:
Let us assume that the selling price before increment is ` 100, the other relevant details are as follows:
Particulars Before increase After increase
Selling Price 100 110
Variable Cost 60 63
Contribution 40 47
P/V Ratio 40% 42.73%
(i) Computation of Break-even point sales:
FixedOverheads
Break-even point sales =
P / Vratio
` 20, 00, 000

- Before increase = = ` 50,00,000
40%
` 30, 00, 000

- After increase = = ` 70,20,828 (approx.)
42.73%
(ii) Sales value to make a profit of ` 4,50,000 :
Fixed Overheads + Desired profit ` 30, 00, 000 + ` 4, 50, 000

= = = ` 80,73,953.
P / Vratio 42.73%

Q-21 A Ltd. manufacture and sales its product R-9. The following figures have been collected from cost
records of last year for the product R-9:
Direct Material 30% of Cost of Goods Sold --
Direct Labour 15% of Cost of Goods Sold --
Factory Overhead 10% of Cost of Goods Sold Rs. 2,30,000
Administration Overhead 2% of Cost of Goods Sold Rs. 71,000
Selling & Distribution Overhead 4% of Cost of Sales Rs. 68,000
Last Year 5,000 units were sold at Rs.185 per unit. From the given DETERMINE the followings:
(Assume that Administration Overhead is related with production activity).
Ans. Working Notes:
COGS = {(DM- 0.3 COGS) + (DL- 0.15 COGS) + (FOH- 0.10 COGS +
Rs. 2,30,000) + (AOH- 0.02 COGS + Rs. 71,000)}0.57 COGS + Rs. 3,01,000
Or, COGS = 0.57 COGS + Rs. 3,01,000
Rs.3, 01, 000
Or COGS = = Rs.7, 00, 000
0.43
COS = COGS + (S&DOH- 0.04 COS + Rs. 68,000)
Or COS = Rs. 7,00,000 + (0.04 COS + Rs. 68,000)
Rs.7, 68, 000
Or, COS = = Rs.8, 00, 000
0.96
Direct Material- (0.30 × Rs. 7,00,000) Rs. 2,10,000
Direct Labour- (0.15 × Rs. 7,00,000) Rs. 1,05,000
Factory Overhead- (0.10 × Rs. 7,00,000) Rs. 70,000
Administration OH- (0.02 × Rs. 7,00,000) Rs. 14,000
Selling & Distribution OH (0.04 × Rs. 8,00,000) Rs. 32,000
Rs. 4,31,000
Factory Overhead- Rs. 2,30,000
Administration OH- Rs. 71,000
Selling & Distribution OH Rs. 68,000
Rs. 3,69,000

Contribution Sales VariableCosts

P / V Ratio = × 100 = × 100
Sales Sales
=
Rs.185 × 5, 000 units  - Rs.4, 31, 000 × 100 = 53.41%
Rs.185 × 5, 000 units
Fixed Costs Rs.3,69, 000

(i) Break-Even Sales = = = Rs.6,90,882
P / V Ratio 53.41%
= (Sales – Total Variable Costs) – Total Fixed Costs
= (Rs.9,25,000 - Rs.4,31,000) - Rs.3,69,000
= Rs.1,25,000
Rs.9,25,000 - Rs.6,90,882
(iii) Margin of Safety (%) = × 100 = 25.31%
Rs.9,25,000
Rs.9,25,000 - Rs.6,90,882
= × 100 = 25.31%
Rs.9,25,000
Profit = 90% (Rs.9,25,000 - Rs.4,31,000) - Rs.3,69,000
= Rs.4,44,600 - Rs.3,69,000 = Rs.75,600
Q-22 Can Cola, a zero sugar cold drink manufacturing Indian company, is planning to establish a subsidiary
company in Nepal to produce coconut flavoured juice. Based on the estimated annual sales of 60,000
bottles of the juice, cost studies produced the following estimates for the Nepalese subsidiary:
Total Annual Costs Percent of Total Annual Cost
(`) which is variable
Material 2,70,000 100%
Labour 1,97,000 80%
Factory Overheads 1,20,000 60%
Administration Expenses 52,000 35%
The Nepalese production will be sold by manufacturer’s representatives who will receive a
commission of 9% of the sale price. No portion of the Indian office expenses is to be allocated to the
Nepalese subsidiary. You are required to-
(i) COMPUTE the sale price per bottle to enable the management to realize an estimated 20% profit
on sale proceeds in Nepal.
(ii) CALCULATE the break-even point in rupees value sales and also in number of bottles for the
Nepalese subsidiary on the assumption that the sale price is ` 14 per bottle.
Ans.(i) Computation of Sale Price Per Bottle
Output: 60,000 Bottles

(`)
Variable Cost:
Material 2,70,000
Labour (` 1,97,000 × 80%) 1,57,600
Factory Overheads (`1,20,000 × 60%) 72,000
Administrative Overheads (` 52,000 × 35%) 18,200
Commission (9% on ‘9,00,000 (Working Note -1)) 81,000
Fixed Cost:
Labour (` 1,97,000 × 20%) 39,400
Factory Overheads (` 1,20,000 × 40%) 48,000
Administrative Overheads (` 52,000 × 65%) 33,800
Total Cost 7,20,000
Profit (20% of ` 9,00,000) 1,80,000
Sales Proceeds 9,00,000
Sales Price per bottle Rs.9,00,000 15
60,000
(ii) Calculation of Break-even Point
Sales Price per Bottle = ` 14
Variable Cost per Bottle = Rs.5,93,400(workingnote 2) = `9.89
60,000bottles
Contribution per Bottle = ` 14 x ` 9.89 = ` 4.11
Break -even Point (in number of Bottles) = Fixedcost Contributionper bottle
= Rs.1,21,200 = 29,489
Rs.4.11
Break- even Point (in Sales Value) = 29,489 Bottles × ` 14
= ` 4,12,846
Working Note
(1) Let the Sales Price be ‘X’
9X
Commission =
100
20X
Profit =
100
X =`2,70,000 + `1,57,600 + ` 72,000 + ` 18,200 + ` 39,400 + ` 48,000 +
9X 20X
`33,800 + +
100 100
9X 20X
X = ` 6,39,000 + +
100 100

100X – 9X – 20X = 6,39,00,000

71X = 6,39,00,000
6, 39, 00, 000

X= = ` 9,00,000
71
(2)
Total Variable Cost (`)
Material 2,70,000
Labour 1,57,600
Factory Overheads 72,000
Administrative Overheads 18,200
Commission [(60,000 Bottles × ` 14) × 9%] 75,600
5,93,400
Q-23 J Ltd. manufactures a Product-Y. Analysis of income statement indicated a profit of ` 250 lakhs on a sales
volume of 5,00,000 units. Fixed costs are `1,000 lakhs which appears to be high. Existing selling price is
`680 per unit. The company is considering revising the profit target to ` 700 lakhs. You are required to
COMPUTE –
(i) Break- even point at existing levels in units and in rupees.
(ii) The number of units required to be sold to earn the target profit.
(iii) Profit with 10% increase in selling price and drop in sales volume by 10%.
(iv) Volume to be achieved to earn target profit at the revised selling price as calculated in (ii) above,
if a reduction of 10% in the variable costs and ‘ 170 lakhs in the fixed cost is envisaged.
Ans. Sales Volume 5,00,000 Units
Computation of existing contribution
Particulars Per unit (`) Total (` In lakhs)
Sales 680 3,400
Fixed Cost 200 1,000
Profit 50 250
Contribution 250 1,250
Variable Cost (Sales – Contribution) 430 2,150
(i) Fixed Cost `10, 00,00,000

Break even sales in units = = = 4,00, 000 units
Contribution per unit `250
Break even sales in rupees = 4,00,000 units × ` 680 = ` 2,720 lakhs
OR
250
P / V Ratio × 100 = 36, 76%
680

Fixed Cost 10, 00,00, 000

B.EP (Rupees)= = =`2,720lakhs(approx)
P / V Ratio 36,76%
(ii) Number of units sold to achieve a target profit of `700 lakhs:
Desired Contribution = Fixed Cost + Target Profit
= 1,000 L + 700 L = 1,700 L
Desired Contribution 17,00, 00,000

= = 6,80,000 units
Number of units to be sold = Contribution per unit 250
(iii) Profit if selling price is increased by 10% and sales volume drops by 10%:
Existing Selling Price per unit = ` 680
Revised selling price per unit = ` 680 × 110% = `748
Existing Sales Volume = 5,00,000 units
Revised sales volume = 5,00,000 units – 10% of 5,00,000 = 4,50,000 units.
Statement of profit at sales volume of 4,50,000 units @ ` 748 per unit
Particulars Per unit (`) Total (` In lakhs)
Sales 748 3,366
Less: Variable Costs 430 1,935
Contribution 318 1,431
Less: Fixed Cost 1,000
Profit 431
(iv) Volume to be achieved to earn target profit of `700 lakhs with revised selling price and reduction
of 10% in variable costs and `170 lakhs in fixed cost:
Revised selling price per unit = `748
Variable costs per unit existing = ` 430
Revised Variable Costs
Reduction of 10% in variable costs = ` 430 – 10% of 430
= ` 430 – `43
= `387
Total Fixed Cost (existing) = ` 1,000 lakhs
Reduction in fixed cost = ` 170 lakhs
Revised fixed cost = `1,000 lakhs – ` 170 lakhs = `830 lakhs
Revised Contribution (unit) = Revised selling price per unit – Revised
Variable Costs per units
Revised Contribution per unit = ` 748 – ` 387 = `361
Desired Contribution = Revised Fixed Cost + Target Profit
= ` 830 lakhs + `700 lakhs = `1,530 lakhs
Desired Contribution 15,30, 00,000

= = 4,23,823 units
No. of units to be sold = Contribution per unit ` 361

Q-24 A Limited manufactures three different products and the following information has been collected
from the books of accounts:
Products
S T U
Sales Mix 25% 35% 40%
Selling Price ` 600 ` 800 ` 400
Variable Cost ` 300 ` 400 ` 240
Total Fixed Costs ` 36,00,000
Total Sales ` 1,20,00,000
The company has currently under discussion, a proposal to discontinue the manufacture of Product U
and replace it with Product M, when the following results are anticipated:
Products
S T U
Sales Mix 40% 35% 25%
Selling Price ` 600 ` 800 ` 600
Variable Cost ` 300 ` 400 ` 300
Required
(i) Compute the PV ratio, total contribution, profit and Break-even sales for the existing product mix.
(ii) Compute the PV ratio, total contribution, profit and Break-even sales for the proposed product
mix.
Ans. (i) Computation of PV ratio, contribution and break-even sales for existing product mix
Products Total
S T U
Selling Price (`) 600 800 400
Less: Variable Cost (`) 300 400 240
Contribution per unit (`) 300 400 160
P/V Ratio (Contribution/Selling price) 50% 50% 40%
Sales Mix 25% 35% 40%
Contribution per rupee of sales
(P/V Ratio × Sales Mix) 12.5% 17.5% 16% 46%
Present Total Contribution (` 1,20,00,000 × 46%) ` 55,20,000
Less: Fixed Costs ` 36,00,000
Present Profit ` 19,20,000
Present Break Even Sales (` 36,00,000/0.46) ` 78,26,087

(ii) Computation of PV ratio, contribution and break-even sale for proposed product mix
Products Total
S T U
Sales Mix 40% 35% 25%
(P/V Ratio x Sales Mix) 20% 17.5% 12.5% 50%
Proposed Total Contribution (` 1,28,00,000 x 50%) ` 64,00,000
Less: Fixed Costs `36,00,000
Proposed Profit ` 28,00,000
Proposed Break Even Sales (` 36,00,000/0.50) ` 72 ,00,000
Q-25 Amy Ltd. manufacture and sales its product RM. The following figures have been collected from cost
records of last year for the product RM:
Direct Material 30% of Cost of Goods Sold —
Direct Labour 15% of Cost of Goods Sold —
Factory Overhead 10% of Cost of Goods Sold ` 3,45,000
Administration Overhead 2% of Cost of Goods Sold ` 1,06,500
Selling & Distribution Overhead 4% of Cost of Sales ` 1,02,000
Last Year, 7,500 units were sold at ` 185 per unit. From the given information, DETERMINE the followings:
(Assume that Administration Overhead is related with production activity)
Ans. Working Notes:
COGS = DM + DL + FOH + AOH
COGS = {0.3 COGS + 0.15 COGS + (0.10 COGS + ` 3,45,000) + (0.02 COGS + ` 1,06,500)}
Or, COGS = 0.57 COGS + ` 4,51,500
Or = COGS = = ` 10,50,000

COS = COGS + S&DOH
COS = COGS + (0.04 COS + ` 1,02,000)
Or COS = ` 10,50,000 + (0.04 COS + ` 1,02,000)
Or, COS = = ` 12,00,000


Direct Material- (0.30 x ` 10,50,000) ` 3,15,000
Direct Labour- (0.15 x ` 10,50,000) ` 1,57,500
Factory Overhead- (0.10 x ` 10,50,000) ` 1,05,000
Administration OH- (0.02 x ` 10,50,000) ` 21,000
Selling & Distribution OH (0.04 x ` 12,00,000) ` 48,000
` 6,46,500
Factory Overhead ` 3,45,000
Administration OH ` 1,06,500
Selling & Distribution OH ` 1,02,000
` 5,53,500
(i) Break-Even Sales =

= (Sales - Total Variable Costs) - Total Fixed Costs
= (` 13,87,500 - ` 6,46,500) - ` 5,53,500
= ` 1,87,500
(iii) Margin of Safety (%) =
Profit = 90% (` 13,87,500 -` 6,46,500) - ` 5,53,500
= ` 1,13,400
Q-26 LR Ltd. is considering two alternative methods to manufacture a new product it intends to market. The
two methods have a maximum output of 50,000 units each and produce identical items with a selling
price of ` 25 each. The costs are:

Method-1 Method-2
Semi-Automatic Fully-Automatic
(`) (`)
Variable cost per unit 15 10
Fixed costs 1,00,000 3,00,000
(1) Cost Indifference Point in units. Interpret your results.
(2) The Break-even Point of each method in terms of units.
Ans. (i) Cost Indifference Point
Method-1 and Method-2
(`)
Differential Fixed Cost (I) ` 2,00,000
(` 3,00,000 – ` 1,00,000)
Differential Variable Costs (II) `5
(` 15 – ` 10)
Cost Indifference Point (I/II) 40,000
(Differential Fixed Cost / Differential Variable Costs per unit)
Interpretation of Results
At activity level below the indifference points, the alternative with lower fixed costs and higher variable
costs should be used. At activity level above the indifference
point, alternative with higher fixed costs and lower variable costs should be used.
No. of Product Alternative to be Chosen
Product d” 40,000 units Method-1, Semi-Automatic
Product e” 40,000 units Method-2, Automatic
(ii) Break Even point (in units)
Method-1 Method-2
BEP (in units) = Fixed cost / Contribution per unit 1,00,000 / (25-15) 3,00,000/(25-10)
= 10,000 = 20,000
Q-27 Answer the following:
During a particular period ABC Ltd has furnished the following data:
Sales ` 10,00,000
Contribution to sales ratio 37% and
Margin of safety is 25% of sales.
A decrease in selling price and decrease in the fixed cost could change the “contribution to sales ratio”
to 30% and “margin of safety” to 40% of the revised sales. Calculate:
(i) Revised Fixed Cost.
(ii) Revised Sales and
(iii) New Break-Even Point.
Ans. Contribution to sales ratio (P/V ratio) = 37%
Variable cost ratio = 100% - 37% = 63%
Variable cost = ` 10,00,000 x 63% = ` 6,30,000

After decrease in selling price and fixed cost, sales quantity has not changed. Thus, variable cost is `
6,30,000.
Revised Contribution to sales = 30%
Thus, Variable cost ratio = 100% ƒ{ 30% = 70%
6,30,000
Thus, Revised sales = = ` 9,00,000
70%
Revised, Break-even sales ratio = 100% - 40% (revised Margin of safety) = 60%
(i) Revised fixed cost = revised breakeven sales x revised contribution to
sales ratio
= ` 5,40,000 (` 9,00,000 x 60%) x 30%
= ` 1,62,000
(ii) Revised sales = ` 9,00,000 (as calculated above)
(iii) Revised Break-even point = Revised sales x Revised break-even sales ratio
= ` 9,00,000 x 60%
= ` 5,40,000
Q-28 Two manufacturing companies A and B are planning to merge. The details are as follows:
A B
Capacity utilisation (%) 90 60
Sales (`) 63,00,000 48,00,000
Variable Cost (`) 39,60,000 22,50,000
Fixed Cost (`) 13,00,000 15,00,000
Assuming that the proposal is implemented, calculate:
(i) Break-Even sales of the merged plant and the capacity utilization at that stage.
(ii) Profitability of the merged plant at 80% capacity utilization.
(iii) Sales Turnover of the merged plant to earn a profit of ` 60,00,000.
(iv) When the merged plant is working at a capacity to earn a profit of ` 60,00,000, what percentage of
increase in selling price is required to sustain an increase of 5% in fixed overheads.
Ans. Workings:
1. Statement showing computation of Breakeven of merged plant and other required information
S.No. Particulars Plan A Plant B Merged
Before After Before After Plant
(90%) (100%) (60%) (100%) (100%)
(`) (`) (`) (`) (`)
(i) Sales 63,00,000 70,00,000 48,00,000 80,00,000 1,50,00,000
(ii) Variable cost 39,60,000 44,00,000 22,50,000 37,50,000 81,50,000
(iii) Contribution (i - ii) 23,40,000 26,00,000 25,50,000 42,50,000 68,50,000
(iv) Fixed Cost 13,00,000 13,00,000 15,00,000 15,00,000 28,00,000
(v) Profit (iii - iv) 10,40,000 13,00,000 10,50,000 27,50,000 40,50,000
Contribution
2. PV ratio of merged plant = x 100
Sales

`68,50,000
= x 100 = 45.67 %
`1,50,00,000
Fixed Cost
(i) Break even sales of merged plant =
P/V Ratio
28,00,000
=
45.67%
= ` 61,30,939.34 (approx.)
`61,30,939.34
Capacity utilisation = x 100 = 40.88%
`1,50,00,000
(ii) Profitability of the merged plant at 80% capacity utilisation
= (` 1,50,00,000 x 80%) x P/v ratio – fixed cost
= ` 1,20,00,000 x 45.67% – ` 28,00,000
= ` 26,80,400
(iii) Sales to earn a profit of ` 60,00,000
Fixed Cost + desired profit

Desired sales =
P/V Ratio
`28,00,000 + `60,00,000
=
45.67%
= ` 1,92,68,666 (approx.)
(iv) Increase in fixed cost
= ` 28,00,000 x 5% = ` 1,40,000
Therefore, percentage increase in sales price
` 1,40,000
= x 100 = 0.726% (approx.)
` 1,92,68,666
Q-29 XYZ Ltd. is engaged in the manufacturing of toys. It can produce 4,20,000 toys at its 70% capacity on per
annum basis. Company is in the process of determining sales price for the financial year 2020-21. It has
provided the following information:
Direct Material ` 60 per unit
Direct Labour ` 30 per unit
Indirect Overheads:
Fixed ` 65,50,000 per annum
Variable ` 15 per unit
Semi-variable ` 5,00,000 per annum up to 60% capacity and ` 50,000 for every
5% increase in capacity or part thereof up to 80% capacity and
thereafter ` 75,000 for every 10% increase in capacity or part
thereof.

Company desires to earn a profit of ` 25,00,000 for the year. Company has planned that the factory will
operate at 50% of capacity for first six months of the year and at 75% of capacity for further three
months and for the balance three months, factory will operate at full capacity.
(1) Determine the average selling price at which each of the toy should be sold to earn the desired
profit.
(2) Given the above scenario, advise whether company should accept an offer to sell each Toy at:
(a) ` 130 per Toy
(b) ` 129 per Toy
Ans.(1) Statement of Cost
For For For Total
first 6 further 3 remaining 3
months months months
6,00,000 x 6,00,000 x 6,00,000 x
6/12 x 50% 3/12 x 75% 3/12
= 1,50,000 = 1,12,500 = 1,50,000 4,12,500
units units units units
Direct Material 90,00,000 67,50,000 90,00,000 2,47,50,000
Direct labour 45,00,000 33,75,000 45,00,000 1,23,75,000
Indirect – Variable Expenses 22,50,000 16,87,500 22,50,000 61,87,500
Indirect – Fixed Expenses 32,75,000 16,37,500 16,37,500 65,50,000
Indirect Semi-variable
expenses
- For first six months @ 2,50,000
5,00,000 per annum
- For further three months 1,62,500
@ 6,50,000* per annum
- For further three months 2,12,500 6,25,000
@ 8,50,000** per annum
Total Cost 1,92,75,000 1,36,12,500 1,76,00,000 5,04,87,500
Desired Profit 25,00,000
Sales value 5,29,87,500
Average Sales price per Toy 128.45
* ` 5,00,000+ [3 times (from 60% to 75%) x 50,000] = ` 6,50,000
** ` 6,50,000+ [1 time (from 75% to 80%) x 50,000] + [2 times (from 80% to 100%)
× 75,000] = ‘ 8,50,000
(2) (a) Company Should accept the offer as it is above its targeted sales price of ` 128.45 per toy.
(b) Company Should accept the offer as it is above its targeted sales price of ` 128.45 per toy.
Q-30 Moon Ltd. produces products ‘X’, ‘Y’ and ‘Z’ and has decided to analyse it’s production mix in respect of
these three products - ‘X’, ‘Y’ and ‘Z’.

You have the following information :

X Y Z
Direct Materials ` (per unit) 160 120 80
Variable Overheads ` (per unit) 8 20 12
Direct labour :
Departments: Rate per Hour (`) Hours per unit Hours per unit Hours per unit
X Y Z
Department-A 4 6 10 5
Department-B 8 6 15 11
From the current budget, further details are as below :
X Y Z
Annual Production at present (in units) 10,000 12,000 20,000
Estimated Selling Price per unit (`) 312 400 240
Sales departments estimate of possible sales in the
coming year (in units) 12,000 16,000 24,000
There is a constraint on supply of labour in Department -A and its manpower cannot be increased
beyond its present level.
Required:
(i) Identify the best possible product mix of Moon Ltd.
(ii) Calculate the total contribution from the best possible product mix.
Ans. (i) Statement Showing “Calculation of Contribution/ unit”
Particulars X Y Z
(`) (`) (`)
Selling Price (A) 312 400 240
Variable Cost:
Direct Material 160 120 80
Direct Labour
Dept. A (Rate x Hours) 24 40 20
Dept. B (Rate x Hours) 48 120 88
Variable Overheads 8 20 12
Total Variable Cost (B) 240 300 200
Contribution per unit (A - B) 72 100 40
Hours in Dept. A 6 10 5
Contribution per hour 12 10 8
Rank I II III
Existing Hours = 10,000 x 6hrs. + 12,000 x 10 hrs. + 20,000 x 5 hrs. = 2,80,000 hrs.
Best possible product mix (Allocation of Hours on the basis of ranking)
Produce ‘X’ = 12,000 units
Hours Required = 72,000 hrs (12,000 units × 6 hrs.)
Balance Hours Available = 2,08,000 hrs (2,80,000 hrs. – 72,000 hrs.)
Produce ‘Y’ (the Next Best) = 16,000 units

Hours Required = 1,60,000 hrs (16,000 units × 10 hrs.)

Balance Hours Available = 48,000 hrs (2,08,000 hrs. – 1,60,000 hrs.)
Produce ‘Z’ (balance) = 9,600 units (48,000 hrs./ 5 hrs.)
(ii) Statement Showing “Contribution”
Product Units Contribution/ Unit (`) Total Contribution (`)
X 12,000 72 8,64,000
Y 16,000 100 16,00,000
Z 9,600 40 3,84,000
Total 28,48,000
Q-31 A company has three factories situated in North, East and South with its Head Office in Mumbai. The
Management has received the following summary report on the operations of each factory for a period:
(` in `000)
Factory Sales Profit
Actual Over / (Under) Actual Over / (Under)
Budget Budget
North 1,100 (400) 135 (180)
East 1,450 150 210 90
South 1,200 (200) 330 (110)
CALCULATE the following for each factory and for the company as a whole for the period:
(i) Fixed Cost
(ii) Break-even Sales
Ans. Computation of Profit Volume Ratio
(` in `000)
Factory Sales Profit P/V Ratio
Change in Profit
Change in Sales
Actual Over / Budgeted Actual Over / Budget
(Under) Sales (Under) Profit
Budget Budget
North 1,100 (400) 1,500 135 (180) 315 45%
East 1,450 150 1,300 210 90 120 60%
South 1,200 (200) 1,400 330 (110) 440 55%
(i) Computation of Fixed Costs (` in `000)
Factory Actual P/V Ratio Contribution Actual Fixed Cost
Sales Profit
(1) (2) (3) = (1) × (2) (4) (5) = (3) - (4)
North 1,100 45% 495 135 360
East 1,450 60% 870 210 660
South 1,200 55% 660 330 330
Total 3,750 2,025 675 1,350
(ii) Computation of Break-Even Sales
Factory Fixed Cost P/V Ratio Break-even Sales
(a) (b) (a) / (b)
North 360 45% 800
East 660 60% 1,100
South 330 55% 600
2,500

Fixed Cost
Break-even Sales (Company as Whole) =
Composite P / V Ratio *
`13,50,000
=
54%
= ` 25,00,000
Total Contribution 2,025
*Composite P/V Ratio = = = 54%
Total Actual sales 3,750
Q-32 Aditya Limited manufactures three different products and the following information has been collected
Products
S T U
Sales Mix 35% 35% 30%
Selling Price ` 300 ` 400 ` 200
Variable Cost ` 150 ` 200 ` 120
Total Sales ` 60,00,000
Products
S T M
Sales Mix 50% 25% 25%
Selling Price ` 300 ` 400 ` 300
Variable Cost ` 150 ` 200 ` 150
Total Fixed Cost ` 18,00,000
Total Sales ` 64,00,000
Required
(i) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the existing product mix.
(ii) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the proposed product mix.
Ans. (i) Computation of PV ratio, contribution and break-even sales for existing product mix
Products
Total
S T U
Sales Mix 35% 35% 30%
(P/V Ratio × Sales Mix) 17.5% 17.5% 12% 47%
Present Total Contribution (`60,00,000 × 47%) ` 28,20,000
Present Break Even Sales (`18,00,000/0.47) ` 38,29,787
(ii) Computation of PV ratio, contribution and break-even sale for proposed product mix
Products
S T M Total
Sales Mix 50% 25% 25%
(P/V Ratio x Sales Mix) 25% 12.5% 12.5% 50%
Proposed Total Contribution (`64,00,000 x 50%) ` 32,00,000
Less: Fixed Costs `18,00,000
Proposed Break Even Sales (`18,00,000/0.50) ` 36,00,000
Q-33 What is Margin of Safety? What does a large Margin of Safety indicates? How can you calculate Margin
of Safety?
Ans. Margin of Safety: The margin of safety can be defined as the difference between the expected level of
sale and the breakeven sales.
The larger the margin of safety, the higher is the chances of making profits.
The Margin of Safety can be calculated by identifying the difference between the projected sales and
breakeven sales in units multiplied by the contribution per unit. This is possible because, at the
breakeven point all the fixed costs are recovered and any further contribution goes into the making of
profits.
Margin of Safety = (Projected sales – Breakeven sales) in units x contribution per unit
It also can be calculated as:
Profit
Margin of Safety =
P/V Ratio
Q-34 Difference between Cost Accounting and Management Accounting
Ans.
(i) Nature It records the quantitative It records both qualitative and
aspect only. quantitative aspect.
(ii) Objective It records the cost of It Provides information to
producing a product and management for planning and
providing a service. co-ordination.
(iii) Area It only deals with cost It is wider in scope as it includes
Ascertainment. financial accounting, budgeting,
taxation, planning etc.
(iv) Recording of data It uses both past and It is focused with the projection
present figures. of figures for future.
(v) Development Its development is related It develops in accordance to the
to industrial revolution. need of modern business world.
(vi) Rules and It follows certain principles It does not follow any specific
Regulation and procedures for rules and regulations.
recording costs of different
products.

Q-35 A Limited manufactures three different products and the following information has been collected
Products S T U
Sales Mix 25% 35% 40%
Selling Price ` 600 ‘800 ` 400
Variable Cost ` 300 ‘400 `240
Products
S T M
Sales Mix 40% 35% 25%
Selling Price ` 600 ` 800 ` 600
Variable Cost ` 300 ` 400 ` 300
Required:
(i) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the existing product mix.
(ii) COMPUTE the PV ratio, total contribution, profit and Break-even sales for the proposed product
mix.
Ans.
(i) Computation of PV ratio, contribution, profit and break-even sales for existing product mix
Products
S T U Total
Sales Mix 25% 35% 40%
Contribution per rupee of sales 12.5% 17.5% 16% 46%
(P/V Ratio × Sales Mix)
Present Total Contribution (`1,20,00,000 × 46%) ` 55,20,000
Present Break Even Sales (` 36,00,000/0.46) ` 78,26,087
(ii) Computation of PV ratio, contribution, profit and break-even sale for proposed product mix
Products
S T M Total


Sales Mix 40% 35% 25%
Contribution per rupee of sales 20% 17.5% 12.5% 50%
(P/V Ratio x Sales Mix)
Proposed Total Contribution (` 1,28,00,000 x 50%) ` 64,00,000
Proposed Break- Even Sales (` 36,00,000/0.50) ` 72,00,000
Q-35 AZ company has prepared its budget for the production of 2,00,000 units. The variable cost per unit is `
16 and fixed cost is ` 4 per unit. The company fixes its selling price to fetch a profit of 20% on total cost.
(i) Present break-even sales (in ` and in quantity).
(ii) Present profit-volume ratio.
(iii) Revised break-even sales in ` and the revised profit-volume ratio, if it reduces its selling price by
10%.
(iv) What would be revised sales- in quantity and the amount, if a company desires a profit increase of
20% more than the budgeted profit and selling price is reduced by 10% as above in point (iii).
Answer
(b) Variable Cost per Unit=`16

Fixed Cost per Unit =` 4, Total Fixed Cost= 2,00,000 units x ` 4 = `8,00,000
Total Cost per Unit =`20
Selling Price per Unit=Total Cost+ Profit =` 20+` 4 =` 24
Contribution per Unit=` 24-`16=` 8
(i) Present Break-even Sales (Quantity) =
= 1,00,000 units
Present Break-even Sales (`) = 1,00,000 units „e` 24 = ` 24,00,000
(ii) Present P/V Ratio = 8/24 x 100 = 33.33%
(iii) Revised Selling Price per Unit = ` 24 – 10% of ` 24 = ` 21.60
Revised Contribution per Unit=` 21.60-` 16 = ` 5.60
Revised P/V Ratio = 5.60/ 21.60 x 100 = 25.926%
Revised Break-even point (`) =
Or
Revised Break-even point (units) =
units
Revised Break-even point (`) = 1,42,857 units x ` 21.60 = ` 30,85,711
(iv) Present profit =` 8,00,000

Desired Profit = 120% of ` 8,00,000 =` 9,60,000

Sales to earn a profit of ` 9,60,000
Total contribution required = 8.00.000 + 9,60,000 = ` 17,60,000
Revised sales (in `) = 3,14,286 units x ` 21.60 = ` 67,88,578.

Q-36 Company manufacture and sell 3 types of mobile handset. It also manufactures wireless charger for
mobile. The company has worked out following estimates for next year.
Annual Demand Selling Price Material cost Labour cost
(in units) (` per unit) (` per unit) (` per unit)
X5 5,000 8,000 2,000 1,000
X6 4,000 9,000 2,500 1,500
X7 3,000 12,000 3,000 2,000
Wireless Charger 15,000 1,500 300 200
To encourage the sale of wireless charger a discount of 10% in its price is being offered if it were to be
purchased along with mobile. It is expected that customer buying mobile will also buy the wireless
charger. The company factory has an effective capacity of 35,000 labour hours. The labour is paid @ `
500 per hour. Overtime of labour has to be paid at double the normal rate. Other variable cost work out
to be 50% of direct labour cost and fixed cost is ` 1,00,00,000. There will be no inventory at the end of
the year.
PREPARE statement of profitability.
Ans.
Calculation of Labour overtime hours
Total hours required for production
X5 (5,000 x 2 hrs) 10,000
X6 (4,000 x 3 hrs) 12,000
X7 (3,000 x 4 hrs) 12,000
Wireless Charger (15,000 x 0.40 hrs) 6,000
40,000
Hours available (35,000)
Overtime 5,000
Statement of Profitability
Sales
X5 (5,000 x 8,000) 4,00,00,000
X6 (4,000 x 9,000) 3,60,00,000
X7 (3,000 x 12,000) 3,60,00,000
Wireless Charger [(12,000 x 1,350) + (3,000 x 1,500) 2,07,00,000 13,27,00,000
Less: Variable cost
Material:
X5 (5,000 x 2,000)
X6 (4,000 x 2,500)

X7 (3,000 x 3,000)
Wireless Charger (15,000 x 300) 3,35,00,000
Labour:
X5 (5,000 x 1,000)
X6 (4,000 x 1,500)
X7 (3,000 x 2,000)
Wireless Charger (15,000 x 200)
Overtime (5,000 x 1,000) 2,50,00,000
Other variable overheads 1,25,00,000 7,10,00,000
Contribution 6,17,00,000
Less: Fixed Cost 1,00,00,000
Profit 5,17,00,000
Q-37 At budget activity of 80% of total capacity, a company earns a P/V ratio of 30% and a profit of 15% of total
sales. Due to covid pandemic resulting in poor demand, the company has to reduce its selling price by
10%. The company was able to achieve a production and sales volume for the year equivalent to 50% of
total capacity. The sales value at this level was ` 27,00,000 at a reduced price of ` 18 per unit. Due to
reduction in production, the actual variable cost went up by 5% of the budget.
(i) PREPARE statement of profitability at budget and actual activity.
(ii) FIND P/V ratio and BES (in ‘ and unit of the actual sales activity).
Ans.
Actual Sales ‘ 27,00,000
Actual Selling Price per unit 18
Actual units (50%) 1,50,000
Therefore, budgeted units (80%) 2,40,000
Budgeted Selling Price 20
Budgeted Variable cost per unit = = ` 14
(i) Statement of profitability at budget and actual activity

Particulars Budget (80%) Actual (50%)
Units 2,40,000 1,50,000
Sales (`) (a) 48,00,000 27,00,000
Variable cost (`) (b) 33,60,000 22,05,000
Contribution (`) (c = a - b) 14,40,000 4,95,000
Fixed cost (`) (d) 7,20,000 7,20,000
Profit (`) (e = c – d) 7,20,000 (2,25,000)

(ii) Calculation of P/V ratio and BES
---0---0---


CHAPTER - 15
BUDGET & BUDGETARY CONTROL
Q-1 A Vehicle manufacturer has prepared sales budget for the next few months, and the following draft
figures are available:
Month No. of vehicles
October 40,000
November 35,000
December 45,000
January 60,000
February 65,000
To manufacture a vehicle a standard cost of `11,42,800 is incurred and sold through dealers at a uniform
selling price of `17,14,200 to customers. Dealers are paid 15% commission on selling price on sale of a
vehicle.
Apart from other materials, four units of Part - X are required to manufacture a vehicle. It is a policy of
the company to hold stocks of Part-X at the end of each month to cover 40% of next month’s production.
48,000 units of Part-X are in stock as on 1st October.
There are 9,500 nos. of completed vehicles in stock as on 1st October and it is policy to have stocks at
the end of each month to cover 20% of the next month’s sales.
You are required to -
(i) PREPARE Production budget (in nos.) for the month of October, November, December and January.
(ii) PREPARE a Purchase budget for Part-X (in units) for the months of October, November and
December.
(iii) CALCULATE the budgeted gross profit for the quarter October to December.
Ans.(i) Preparation of Production Budget (in units)
October November December January
Demand for the month (Nos.) 40,000 35,000 45,000 60,000
Add: 20% of next month’s demand 7,000 9,000 12,000 13,000
Less: Opening Stock (9,500) (7,000) (9,000) (12,000)
Vehicles to be produced 37,500 37,000 48,000 61,000

(ii) Preparation of Purchase budget for Part-X

October November December
Production for the month (Nos.) 37,500 37,000 48,000
Add: 40% of next month’s production 14,800 19,200 24,400
(40% of 37,000) (40% of 48,000) (40% of 61,000)
52,300 56,200 72,400
No. of units required for production 2,09,200 2,24,800 2,89,600
(52,300 × 4 units) (56,200 × 4 units) (72,400 × 4 units)
Less: Opening Stock (48,000) (59,200) (76,800)
(14,800 × 4 units) (19,200 × 4 units)
No. of units to be purchased 1,61,200 1,65,600 2,12,800
(iii) Budgeted Gross Profit for the Quarter October to December
October November December Total
Sales in nos. 40,000 35,000 45,000 1,20,000
Net Selling Price per unit* (`) 14,57,070 14,57,070 14,57,070
Sales Revenue (` in lakh) 5,82,828 5,09,974.50 6,55,681.50 17,48,484
Less: Cost of Sales (` in lakh)
(Sales unit × Cost per unit) 4,57,120 3,99,980 5,14,260 13,71,360
Gross Profit (` in lakh) 1,25,708 1,09,994.50 1,41,421.50 3,77,124
* Net Selling price unit =`17,14,200 – 15% commission on `17,14,200 = ` 14,57,070.
Q-2 KLM Limited has prepared its expense budget for 50,000 units in its factory for the year 2019-20 as
detailed below:
(` per unit)
Direct Materials 125
Direct Labour 50
Variable Overhead 40
Direct Expenses 15
Selling Expenses (20% fixed) 25
Factory Expenses (100% fixed) 15
Administration expenses (100% fixed) 8
Distribution expenses (85% variable) 20
Total 298
PREPARE an expense budget for the production of 35,000 units and 70,000 units.
Ans. Expense Budget of KLM Ltd.
Particulars 50,000 Units(`) 35,000 Units(`) 70,000 Units (`)
Direct Material 62,50,000 43,75,000 87,50,000
(50,000 x 125) (35,000 x 125) (70,000 x 125)
Direct Labour 25,00,000 17,50,000 35,00,000
(50,000 x 50) (35,000 x 50) (70,000 x 50)
Variable Overhead 20,00,000 14,00,000 28,00,000
506- Chapter-15 : Budget & Budgetary Control

(50,000 x 40) (35,000 x 40) (70,000 x 40)

Direct Expenses 7,50,000 5,25,000 10,50,000
(50,000 x 15) (35,000 x 15) (70,000 x 15)
Selling Expenses (Variable)* 10,00,000 7,00,000 14,00,000
(50,000 x 20) (35,000 x 20) (70,000 x 20)
Selling Expenses (Fixed)*(5 x 50,000) 2,50,000 2,50,000 2,50,000
Factory Expenses (Fixed)(15 x 50,000) 7,50,000 7,50,000 7,50,000
Administration Expenses (Fixed)(8 x 50,000) 4,00,000 4,00,000 4,00,000
Distribution Expenses (Variable)** 8,50,000 5,95,000 11,90,000
(17 x 50,000) (17 x 35,000) (17 x 70,000)
Distribution Expenses (Fixed)**(3 x 50,000) 1,50,000 1,50,000 1,50,000
1,49,00,000 1,08,95,000 2,02,40,000
*Selling Expenses: Fixed cost per unit = ` 25 x 20% = ` 5
Fixed Cost = ` 5 x 50,000 units = ` 2,50,000
Variable Cost Per unit = ` 25 – ` 5 = ` 20
**Distribution Expenses: Fixed cost per unit = ` 20 x 15% = ` 3
Fixed Cost = `3 x 50,000 units = `1,50,000
Variable cost per unit = `20 – ` 3 = ` 17
Q-3 S Ltd. has prepared budget for the coming year for its two products A and B.
Product A (`) Product B (`)
Production & Sales unit 6,000 units 9,000 units
Raw material cost per unit 60.00 42.00
Direct labour cost per unit 30.00 18.00
Variable overhead per unit 12.00 6.00
Fixed overhead per unit 8.00 4.00
Selling price per unit 120.00 78.00
After some marketing efforts, the sales quantity of the Product A & B can be increased by 1,500 units
and 500 units respectively but for this purpose the variable overhead and fixed overhead will be
increased by 10% and 5% respectively for the both products.
You are required to PREPARE flexible budget for both the products:
(a) Before marketing efforts
(b) After marketing efforts.
Ans.
(a) Flexible Budget before marketing efforts:
6,000 units 9,000 units
Per unit Total Per unit Total
Sales 120.00 7,20,000 78.00 7,02,000
Raw material cost 60.00 3,60,000 42.00 3,78,000
Direct labour cost per unit 30.00 1,80,000 18.00 1,62,000
Variable overhead per unit 12.00 72,000 6.00 54,000
Fixed overhead per unit 8.00 48,000 4.00 36,000
Total cost 110.00 6,60,000 70.00 6,30,000
Profit 10.00 60,000 8.00 72,000

(b) Flexible Budget after marketing efforts:

Sales 120.00 9,00,000 78.00 7,41,000
Total cost 109.92 8,24,400 70.58 6,70,500
Profit 10.08 75,600 7.42 70,500
Q-4 Gaurav Ltd. is drawing a production plan for its two products Minimax (MM) and Heavyhigh (HH) for the
year 20X8-X9. The company’s policy is to hold closing stock of finished goods at 25% of the anticipated
volume of sales of the succeeding month. The following are the estimated data for two products:
Minimax (MM) Heavyhigh (HH)
Budgeted Production units 1,80,000 1,20,000
(`) (`)
Direct material cost per unit 220 280
Direct labour cost per unit 130 120
Manufacturing overhead 4,00,000 5,00,000
The estimated units to be sold in the first four months of the year 20X8-X9 are as under
April May June July
Minimax 8,000 10,000 12,000 16,000
Heavyhigh 6,000 8,000 9,000 14,000
PREPARE production budget for the first quarter in month-wise.
Ans. Production budget of Product Minimax and Heavyhigh (in units)
April May June Total
MM HH MM HH MM HH MM HH
Sales 8,000 6,000 10,000 8,000 12,000 9,000 30,000 23,000
Add: Closing Stock
(25% of next month’s sale 2,500 2,000 3,000 2,250 4,000 3,500 9,500 7,750
Less: Opening Stock 2,000* 1,500* 2,500 2,000 3,000 2,250 7,500 5,750
Production units 8,500 6,500 10,500 8,250 13,000 10,250 32,000 25,000
*Opening stock of April is the closing stock of March, which is as per company’s policy 25% of next months sale.
Production Cost Budget
Element of cost Rate (`) Amount (`)
MM HH MM HH
(32,000 units) (25,000 units)
Direct Material 220 280 70,40,000 70,00,000
Direct Labour 130 120 41,60,000 30,00,000
Manufacturing Overhead
(4,00,000/ 1,80,000 × 32,000) 71,111
(5,00,000/ 1,20,000 × 25,000) _________ 1,04,167
1,12,71,111 1,01,04,167

Q-5 G Ltd. manufactures two products called ‘M’ and ‘N’. Both products use a common raw material Z. The
raw material Z is purchased @ ` 36 per kg from the market. The company has decided to review
inventory management policies for the forthcoming year.
The following information has been extracted from departmental estimates for the year ended 31st
March 2018 (the budget period):
Product M Product N
Sales (units) 28,000 13,000
Finished goods stock increase by year-end 320 160
Post-production rejection rate (%) 4 6
Material Z usage (per completed unit, net of wastage) 5 kg 6 kg
Material Z wastage (%) 10 5
- Usage of raw material Z is expected to be at a constant rate over the period.
- Annual cost of holding one unit of raw material in stock is 11% of the material cost.
- The cost of placing an orders is ` 320 per order.
- The management of G Ltd. has decided that there should not be more than 40 orders in a year for the
raw material Z.
Required:
(i) PREPARE functional budgets for the year ended 31st March 2018 under the following headings:
(a) Production budget for Products M and N (in units).
(b) Purchases budget for Material Z (in kgs and value).
(ii) CALCULATE the Economic Order Quantity for Material Z (in kgs).
(iii) If there is a sole supplier for the raw material Z in the market and the supplier do not sale more than
4,000 kg. of material Z at a time. Keeping the management purchase policy and production quantity mix
into consideration, CALCULATE the maximum number of units of Product M and N that could be produced.
Ans.
(i) (a) Production Budget (in units) for the year ended 31st March 2016
Product M Product N
Budgeted sales (units) 28,000 13,000
Add: Increase in closing stock 320 160
No. good units to be produced 28,320 13,160
Post production rejection rate 4% 6%
No. of units to be produced 29,500 14,000
 28,320   13,160 
   
 0.96   0.94 
(b) Purchase budget (in kgs and value) for Material Z
Product M Product N
No. of units to be produced 29,500 14,000
Usage of Material Z per unit of production 5 kg. 6 kg.
Material needed for production 1,47,500 kg. 84,000 kg.
Materials to be purchased 1,63,889 kg. 88,421 kg.

 1,47,500   84,000 
   
 0.90   0.95 
Total quantity to be purchased 2,52,310 kg.

Rate per kg. of Material Z `36
Total purchase price `90,83,160
(ii) Calculation of Economic Order Quantity for Material Z
2  2,52,310kg.  320 16,14,78,400

EOQ = = = 6,385.72 kg.
` 36  11% `3.96
(iii) Since, the maximum number of order per year can not be more than 40 orders and the maximum
quantity per order that can be purchased is 4,000 kg. Hence, the total quantity of Material Z that can be
available for production:
= 4,000 kg. × 40 orders = 1,60,000 kg.
Product M Product N
Material needed for production to maintain the 1,03,929 kg. 56,071 kg.
 1,63,889   88,421 
same production mix  1,60,000    1,60,000  
 2,52,310   2,52,310 
Less: Process wastage 10,393 kg. 2,804 kg.
Net Material available for
production 93,536 kg. 53,267 kg.
Units to be produced 18,707 units 8,878 units
 93,536 kg.   53,567 kg. 

   
 5 kg.   6 kg. 
Q-6 Define Zero Base Budgeting and mention its various stages.
Ans. Zero-based Budgeting: (ZBB) is an emergent form of budgeting which arises to overcome the limitations
of incremental (traditional) budgeting system. Zero- based Budgeting (ZBB) is defined as ‘a method of
budgeting which requires each cost element to be specifically justified, although the activities to
which the budget relates are being undertaken for the first time, without approval, the budget
allowance is zero’.
ZBB is an activity based budgeting system where budgets are prepared for each activities rather than
functional department. Justification in the form of cost benefits for the activity is required to be given.
The activities are then evaluated and prioritized by the management on the basis of factors like
synchronisation with organisational objectives, availability of funds, regulatory requirement etc.
ZBB is suitable for both corporate and non-corporate entities. In case of non-corporate entities like
Government department, local bodies, not for profit organisations, where these entities need to
justify the benefits of expenditures on social programmes like mid-day meal, installation of street
lights, provision of drinking water etc.

ZBB involves the following stages:

(i) Identification and description of Decision packages
(ii) Evaluation of Decision packages
(iii) Ranking (Prioritisation) of the Decision packages
(iv) Allocation of resources
Q-7 Following data is available for ABC Ltd.:
Standard working hours 8 hours per day of 5 days per week
Maximum Capacity 60 employees
Actual working 50 employees
Actual hours expected to be worked per four week 8,000 hours
Standard hours expected to be earned per four week 9,600 hours
Actual hours worked in the four week period 7,500 hours
Standard hours earned in the four week period 8,800 hours
The related period is of four weeks. Calculate the following Ratios :
(i) Efficiency Ratio (ii) Activity Ratio
(iii) Standard Capacity Usage Ratio (iv) Actual Capacity Usage Ratio
(v) Actual Usage of Budgeted Capacity Ratio
Ans.
Standard Hrs 8,800hours

(i) Efficiency Ratio : × 100 = ×100 = 117.33%
Actual Hrs 7,500hours
Standard Hrs 8,800hours

(ii) Activity Ratio : × 100 = ×100 = 110%
Budgeted Hrs 8,000hours
(iii) Standard Capacity Usage Ratio :
Budgeted Hours 8,800hours
×100 = × 100 = 83.33%
Max. possible hours in the budgeted period 9,600hours
(iv) Actual Capacity Usage Ratio :
Actual Hoursworked 7,500hours
×100 = ×100 = 78.125%
Max. possible working hours in a period 9,600hours
(v) Actual Usage of Budgeted Capacity Ratio :
Actual working Hours 7,500hours
× 100 = ×100 = 93.75%
Budgeted Hours 8,000hours
Working Notes:
1. Maximum Capacity in a budget period= 60 Employees × 8 Hrs. × 5 Days × 4 Weeks = 9,600 Hrs.
2. Budgeted Hours (Hrs)= 50 Employees × 8 Hrs. × 5 Days × 4 Weeks = 8,000 Hrs.
3. Actual Hrs. = 7,500 Hrs. (given)
4. Standard Hrs. for Actual Output = 8,800 Hrs.

Q-8 What are the cases when a flexible budget is found suitable?
Ans. Flexible budgeting may be resorted to under following situations:
(i) In the case of new business venture due to its typical nature it may be difficult toforecast the
demand of a product accurately.
(ii) Where the business is dependent upon the mercy of nature e.g., a person dealing inwool trade
may have enough market if temperature goes below the freezing point.
(iii) In the case of labour-intensive industry where the production of the concern is dependent upon
the availability of labour.
Suitability for flexible budget:
1. Seasonal fluctuations in sales and/or production, for example in soft drinks industry;
2. a company which keeps on introducing new products or makes changes in the design of its products
frequently;
3. industries engaged in make-to-order business like ship building;
4. an industry which is influenced by changes in fashion; and
5. General changes in sales.
Q-9 An electronic gadget manufacturer has prepared sales budget for the next few months. In this respect,
following figures are available:
Months Electronic gadgets' sales
January 5000 units
February 6000 units
March 7000 units
April 7500 units
May 8000 units
To manufacture an electronic gadget, a standard cost of ` 1,500 is incurred and it is sold through dealers
at an uniform price of ` 2,000 per gadget to customers. Dealers are given a discount of 15% on selling
price.
Apart from other materials, two units of batteries are required to manufacture a gadget.
The company wants to hold stock of batteries at the end of each month to cover 30% of next month's
production and to hold stock of manufactured gadgets to cover 25% of the next month's sale.
3250 units of batteries and 1200 units of manufactured gadgets were in stock on 1st January.
Required:
(i) Prepare production budget (in units) for the month of January, February, March and April.
(ii) Prepare purchase budget for batteries (in units) for the month of January, February and March and
calculate profit for the quarter ending on March.
Ans. (i) Preparation of Production Budget (in Units)
January February March April May
Sales 5,000 6,000 7,000 7,500 8,000
Add: Closing stock (25% 1,500 1,750 1,875 2,000
of next month’s sales)
Less: Opening Stock (1200) (1500) (1750) (1875)
Production of electronic Gadgets 5,300 6,250 7,125 7,625

(ii) Preparation of Purchase budget

January February March April
Consumption/production of Batteries
(@ 2 per Gadget) 10,600 12,500 14,250 15,250
Add: Closing Stock (30% of next
month’s production) 3750 4275 4575
Less: Opening Stock 3,250 3,750 4275
Purchase of Batteries 11,100 13,025 14,550
Statement Showing Profit
Jan. Feb. March Total
Sales (A) 5,000 6,000 7,000 18,000
Selling Price per unit* ` 2,000 ` 2,000 ` 2,000 ` 2,000
Less: Discount @15% of selling price 300 300 300 300
Less: Standard cost of
Manufacturing per
gadget Cost 1500 1500 1500 1500
Profit (B) (selling
Price-discount-cost) 200 200 200 200
Total Profit (A × B) ` 10,00,000 ` 12,00,000 ` 14,00,000 ` 36,00,000
Q-10 S Ltd. has prepared budget for the coming year for its two products A and B.
Product A (Rs.) Product B (Rs.)
Production & Sales unit 6,000 units 9,000 units
Raw material cost per unit 60.00 42.00
Direct labour cost per unit 30.00 18.00
Variable overhead per unit 12.00 6.00
Fixed overhead per unit 8.00 4.00
Selling price per unit 120.00 78.00
After some marketing efforts, the sales quantity of the Product A & B can be increased by 1,500 units
and 500 units respectively but for this purpose the variable overhead and fixed overhead will be
increased by 10% and 5% respectively for the both products.
You are required to PREPARE flexible budget for both the products:
(a) Before marketing efforts
(b) After marketing efforts.
Ans. (a) Flexible Budget before marketing efforts:
Sales 120.00 7,20,000 78.00 7,02,000


Total cost 110.00 6,60,000 70.00 6,30,000
Profit 10.00 60,000 8.00 72,000
(b) Flexible Budget after marketing efforts:
Sales 120.00 9,00,000 78.00 7,41,000
T otal cost 109.92 8,24,400 70.58 6,70,500
Profit 10.08 75,600 7.42 70,500
Q-11 Nakata Ltd a Vehicle manufacturer has prepared sales budget for the next few months, and the following
draft figures are available:
Month No. of vehicles
October 40,000
November 35,000
December 45,000
January 60,000
February 65,000
To manufacture a vehicle a standard cost of Rs.5,71,400 is incurred and sold through dealers at a
uniform selling price of Rs.8,57,100 to customers. Dealers are paid 15% commission on selling price on
sale of a vehicle.
Apart from other materials four units of Part - X are required to manufacture a vehicle. It is a policy of
the company to hold stocks of Part-X at the end of each month to cover 40% of next month’s production.
48,000 units of Part-X are in stock as on 1st October.
There are 9, 500 nos. of completed vehicles are in stock as on 1st October and it is policy to have stocks
at the end of each month to cover 20% of the next month’s sales.
(i) PREPARE Production budget (in nos.) for the month of October, November, December and January.
(ii) PREPARE a Purchase budget for Part-X (in units) for the months of October, November and
December.
(iii) CALCULAT E the budgeted gross profi t for the quarter Octob er to December.
Ans.
(i) Preparation of Production Budget (in units)
October November December January
Demand for the month (Nos.) 40,000 35,000 45,000 60,000
Add: 20% of next month’s demand 7,000 9,000 12,000 13,000
Less: Opening Stock (9, 500) (7,000) (9,000) (12,000)
Vehicles to be produced 37, 500 37,000 48,000 61,000

(ii) Preparation of Purchase budget for Part-X

October November December
Production for the month (Nos.) 37,500 37,000 48,000
Add: 40% of next month’s production 14, 800 19,200 24,400
(40% of 37,000) (40% of 48,000) (40% of 61,000)
52,300 56,200 72,400
No. of units required for production 2,09, 200 2,24, 800 2,89, 600
(52300 × 4 units) (56200 × 4 units) (72,400 × 4 units)
Less: Opening Stock (48,000) (59, 200) (76, 800)
(14800 × 4 units) (19200 × 4 units)
No. of units to be purchased 1,61, 200 1,65, 600 2,12, 800
(iii) Budgeted Gross Profit for the Quarter October to December
October November December Total
Sales in nos. 40,000 35,000 45,000 1,20,000
Net Selling Price per unit* 7,28,535 7,28,535 7,28,535
Sales Revenue (Rs. in lakh) 2,91,414 2,54,987.25 3,27,840.75 8,74,242
Less: Cost of Sales (Rs. in lakh)
(Sales unit × Cost per unit) 2,28,560 1,99,990.00 2,57,130.00 6,85,680
Gross Profit (Rs. in lakh) 62,854 54,997.25 70,710.75 1,88,562
* Net Selling price unit = Rs. 8,57,100 – 15% commission on Rs. 8,57,100 = Rs.7,28,535.
Q-12 Maximum Production capacity of KM (P) Ltd. is 28,000 units per month. Output at different levels along
with cost data is furnished below:
Particulars of Costs Activity Level
16,000 units 18,000 units 20,000 units
Direct Material ` 12,80,000 ` 14,40,000 ` 16,00,000
Direct labour ` 17,60,000 ` 19,80,000 ` 22,00,000
Total factory overheads ` 22,00,000 ` 23,70,000 ` 25,40,000
You are required to Calculate the selling price per unit at an activity level of 24,000 units by considering
profit at the rate of 25% on sales.
Ans. Computation of Overheads
Variable Overhead per unit = Change in Factory Overheads
Change in activity level
23,70,000 - 22,00,000 25, 40,000 - 23,70,000
= or
18,000 - 16,000 20,000 - 18,000
1,70,000
= ` 85 per unit
2000
Fixed Overhead
Activity level = 16,000 units
Total factory overheads 22,00,000
Less: Variable overheads 16,000 units @ ` 85 per unit (13,60,000)
Fixed Overhead 8,40,000

Computation of Costs at Activity Level 24,000 units

Per Unit (`) Amount (`)
Direct Material (12,80,000/16,000) 80.00 19,20,000
Direct Labour (17,60,000/16,000) 110.00 26,40,000
Variable Overhead (As calculated above) 85.00 20,40,000
Fixed Overhead 8,40,000
Computation of Selling Price at activity level 24,000 units
Profit required is 25% on selling price, hence cost will be 75%.
25 × 74,40,000
Therefore desired profit = = ` 24,80,000
75
Cost of 24,000 units 74,40,000
Desired Profit 24,80,000
Total Sales 99,20,000
Alternatively
Total Sales = x 100 = x 100 = ` 99,20,000
75 75
Total Sales 99,20,000

Selling Price per unit = = = ` 413.33
No of Units 24,000
Q-13 R Limited is presently operating at 50% capacity and producing 60,000 units. The entire output is sold at
a price of ` 200 per unit. The cost structure at the 50% level of activity is as under:
`
Direct Material 75 per unit
Direct Wages 25 per unit
Variable Overheads 25 per unit
Direct Expenses 15 per unit
Factory Expenses (25% fixed) 20 per unit
Selling and Distribution Exp. (80% variable) 10 per unit
Office and Administrative Exp. (100% fixed) 5 per unit
The company anticipates that the variable costs will go up by 10% and fixed costs will go up by 15%.
You are required to PREPARE an Expense budget, on the basis of marginal cost for the company at 50%
and 60% level of activity and COMPUTE profits at respective levels.
Ans. Expense Budget of R Ltd. for the period ……
50% Capacity 60% Capacity
Per unit (`) 60,000 units 72,000 units
Sales (A) 200.00 1,20,00,000 1,44,00,000
Less: Variable Costs:
- Direct Material 82.50 49,50,000 59,40,000
- Direct Wages 27.50 16,50,000 19,80,000
- Variable Overheads 27.50 16,50,000 19,80,000

- Direct Expenses 16.50 9,90,000 11,88,000

- Variable factory expenses 16.50 9,90,000 11,88,000
(75% of ` 20 p.u.)
- Variable Selling & Dist. exp. 8.80 5,28,000 6,33,600
(80% of ` 10 p.u.) ______ __________ __________
Total Variable Cost (B) 179.30 1,07,58,000 1,29,09,600
Contribution (C) = (A – B) 20.70 12,42,000 14,90,400
Less: Fixed Costs:

- Office and Admin. exp. (100%) -- 3,45,000 3,45,000
- Fixed factory exp. (25%) -- 3,45,000 3,45,000
- Fixed Selling & Dist. exp. (20%) -- 1,38,000 1,38,000
Total Fixed Costs (D) -- 8,28,000 8,28,000
Profit (C – D) -- 4,14,000 6,62,400
Q-14 Calculate from the following figures:
(i) Efficiency ratio
(ii) Activity ratio and
(iii) Capacity ratio.
Budgeted Production 880 units
Standard Hours per unit 10 hours
Actual Production 750 units
Actual Working Hours 6,000 hours
Ans.
(i) Efficiency Ratio = Actual Prodcution in terms of standard hours x 100
Actual hours worked
= 750 units × 10 hours × 100 = 125%
6, 000
(ii) Activity ratio = Actual Production in terms of standard hours x 100
Budgeted production in terms of standard hours
7,500
x 100 = 85.23%
880  10
(iii) Capacity Ratio = Actual hours worked × 100
Maximum hours in a budget period
6,000
x 100 = 68.19%
8,800
Activity ratio = Efficiency Ratio × Capacity Ratio
Or, 85.23% = 125%× 68.19%.

Q-15 Explain the difference between fixed budget and flexible budget.
Ans. Difference between Fixed and Flexible Budgets:
Sl. No. Fixed Budget Flexible Budget
1. It does not change with actual volume of It can be re-casted on the basis of activity
activity achieved. Thus it is known as level to be achieved. Thus it is not rigid.
rigid or inflexible budget
2. It operates on one level of activity and It consists of various budgets for different
under one set of conditions. It assumes levels of activity
that there will be no change in the
prevailing conditions, which is
unrealistic.
3. Here as all costs like - fixed, variable and Here analysis of variance provides useful
semi-variable are related to only one information as each cost is analysed
level of activity so variance analysis according to its behaviour.
does not give useful information.
4. If the budgeted and actual activi ty levels Flexible budgeting at different levels of
differ significantly, then the aspects like activity facilitates the ascertainment of cost,
cost ascertainment and price fixation do fixation of selling price and tendering of
not give a correct picture. quotations.
5. Comparison of actual performance with It provides a mean ingful basis of comparison
budgeted targets will be meaningless of the actual performance with the budgeted
specially when there is a difference targets.
between the two activity levels.
Q-16 Calculate from the following figures:
(i) Efficiency ratio,
(ii) Activity, Ratio and
(iii) Capacity Ratio:
Budgeted Production 88,000 units
Standard Hours per unit 10
Actual Production75,000 units
Actual Working Hours 6,00,000
Standard Hours (for actual production)

Ans. (i) Efficiency Ratio = ×100
Actual Hours (worked)
75,000 units × 10 hrs.

= ×100
6,00,000 hrs.
= 125%

Standard Hours (for actual production)

(ii) Activity Ratio = ×100
Budgeted Hours
75,000 units × 10 hrs.

= ×100
88,000 units × 10 hrs.
= 85.23%
Actual Hours (worked)
(iii) Capacity Ratio = ×100
Budgeted Hours
6,00,000 hrs.
= ×100
88,000 units × 10 hrs.
= 68.18%
Q-17 V Ltd. produces and markets a very popular product called ‘X’. The company is interested in presenting
its budget for the second quarter of 2019.
The following information are made available for this purpose:
(i) It expects to sell 50,000 bags of ‘X’ during the second quarter of 2019 at the selling price of Rs. 900
per bag.
(ii) Each bag of ‘X’ requires 2.5 kgs. of a raw – material called ‘Y’ and 7.5 kgs. of raw – material called ‘Z’.
(iii) Stock levels are planned as follows:
Particulars Beginning of Quarter End of Quarter
Finished Bags of ‘X’ (Nos.) 15,000 11,000
Raw – Material ‘Y’ (Kgs.) 32,000 26,000
Raw – Material ‘Z’ (Kgs.) 57,000 47,000
Empty Bag (Nos.) 37,000 28,000
(iv) ‘Y’ cost Rs.120 per Kg., ‘Z’ costs Rs.20 per Kg. and ‘Empty Bag’ costs Rs.80 each.
(v) It requires 9 minutes of direct labour to produce and fill one bag of ‘X’. Labour cost is Rs.50 per
hour.
(vi) Variable manufacturing costs are Rs.45 per bag. Fixed manufacturing costs Rs.30,00,000 per quarter.
(vii) Variable selling and administration expenses are 5% of sales and fixed administration and selling
expenses are Rs.20,50,000 per quarter.
Required
(i) PREPARE a production budget for the said quarter.
(ii) PREPARE a raw – material purchase budget for ‘Y’, ‘Z’ and ‘Empty Bags’ for the said quarter in
quantity as well as in rupees.
(iii) COMPUTE the budgeted variable cost to produce one bag of ‘X’.
(iv) PREPARE a statement of budgeted net income for the said quarter and show both per unit and
total cost data.
Ans.(i) Production Budget of ‘X’ for the Second Quarter
Particulars Bags (Nos.)
Budgeted Sales 50,000
Add: Desired Closing stock 11,000
Total Requirements 61,000
Less: Opening stock 15,000
Required Production 46,000

(ii) Raw–Materials Purchase Budget in Quantity as well as in Rs. for 46,000 Bags of ‘X’
Particulars ‘Y’ ‘Z’ Empty Bags
Kgs. Kgs. Nos.
Production Requirements 2.5 7.5 1.0
Per bag of ‘X’
Requirement for Production 1,15,000 3,45,000 46,000
(46,000 × 2.5) (46,000 × 7.5) (46,000 × 1)
Add: Desired Closing Stock 26,000 47,000 28,000
Total Requirements 1,41,000 3,92,000 74,000
Less: Opening Stock 32,000 57,000 37,000
Quantity to be purchased 1,09,000 3,35,000 37,000
Cost per Kg./Bag Rs.120 Rs.20 Rs.80
Cost of Purchase (Rs.) 1,30,80,000 67,00,000 29,60,000
(iii) Computation of Budgeted Variable Cost of Production of 1 Bag of ‘X’
Particulars (Rs.)
Raw – Material
Y 2.5 Kg @120 300.00
Z 7.5 Kg. @20 150.00
Empty Bag 80.00
Direct Labour(Rs.50× 9 minutes / 60 minutes) 7.50
Variable Manufacturing Overheads 45.00
Variable Cost of Production per bag 582.50
(iv) Budgeted Net Income for the Second Quarter
Particulars Per Bag (Rs.) Total (Rs.)
Sales Value (50,000 Bags) 900.00 4,50,00,000
Less: Variable Cost:
Production Cost 582.50 2,91,25,000
Admn. & Selling Expenses (5% of Sales Price) 45.00 22,50,000
Budgeted Contribution 272.50 1,36,25,000
Less: Fixed Expenses:
Manufacturing 30,00,000
Admn. & Selling 20,50,000
Budgeted Net Income 85,75,000
Q-18 C Ltd. manufactures two products using two types of materials and one grade of labour. Shown below
is an extract from the company’s working papers for the next month’s budget:
Product-A Product-B
Budgeted sales (in units) 2,400 3,600
Budgeted material consumption per unit (in kg):
Material-X 5 3
Material-Y 4 6
Standard labour hours allowed per unit of product 3 5

Material-X and Material-Y cost Rs. 4 and Rs. 6 per kg and labours are paid Rs. 25 per hour. Overtime
premium is 50% and is paid, if a worker works for more than 40 hours a week. There are 180 direct
workers.
The target productivity ratio (or efficiency ratio) for the productive hours worked by the direct workers
in actually manufacturing the products is 80%. In addition, the non-productive down-time is budgeted
at 20% of the productive hours worked.
There are four 5-days weeks in the budgeted period and it is anticipated that sales and production will
occur evenly throughout the whole period.
It is anticipated that stock at the beginning of the period will be:
Product-A 400 units
Product-B 200 units
Material-X 1,000 kg.
Material-Y 500 kg.
The anticipated closing stocks for budget period are as below:
Product-A 4 days sales
Product-B 5 days sales
Material-X 10 days consumption
Material-Y 6 days consumption
Required:
CALCULATE the Material Purchase Budget and the Wages Budget for the direct workers, showing the
quantities and values, for the next month.
Ans. Number of days in budget period = 4 weeks × 5 days = 20 days
Number of units to be produced
Product-A (units) Product-B (units)
Budgeted Sales 2,400 3,600
Add: Closing stock 480 900
 2,400 units   3,600 units 

 20 days × 4 days   20 days × 5 days 
   
Less: Opening stock (400) (200)
2,480 4,300
(i) Material Purchase Budget

Material-X (Kg.) Material-Y (Kg.)
Material required:
- Product-A 12,400 (2,480 units × 5 kg.) 9,920 (2,480 units × 4 kg.)
- Product-B 12,900 (4,300 units × 3 kg.) 25,800 (4,300 units × 6 kg.)
25,300 35,720
Add: Closing stock 12,650 10,716

 25,300 kgs.   35,720 kgs. 

 20 days × 10 days   20 days × 6 days 
   
Less: Opening stock (1,000) (500)
Quantity to be purchased 36,950 45,936
Rate per kg. of Material `4 `6
Total Cost ` 1,47,800 ` 2,75,616
(ii) Wages Budget
Product-A (Hours) Product-B (Hours)
Units to be produced 2,480 units 4,300 units
Standard hours allowed per unit 3 5
Total Standard Hours allowed 7,440 21,500
7,440 hours 21,500 hours

Productive hours required for production = 9,300 = 26, 875
80% 80%
Add: Non-Productive down time 1,860 hours. 5,375 hours.
(20% of 9,300 hours) (20% of 26,875 hours)
Hours to be paid 11,160 32,250
Total Hours to be paid = 43,410 hours (11,160 + 32,250)
Hours to be paid at normal rate = 4 weeks × 40 hours × 180 workers = 28,800 hours
Hours to be paid at premium rate = 43,410 hours – 28,800 hours = 14,610 hours
Total wages to be paid = 28,800 hours × ` 25 + 14,610 hours × ` 37.5
= ` 7,20,000 + ` 5,47,875
= ` 12,67,875
Q-19 ‘Mirror Look’, a high gloss wooden manufacturing company, requires you to PREPARE the Master budget
for the next year from the following information:
Sales:
Acrylic finish wooden sheets ` 70,00,000
Lacquer finish wooden sheets ` 30,00,000
Direct material cost 65% of sales
Direct wages 25 workers @ ` 1,500 per month
Factory overheads:
Indirect labour –
Works manager ` 5,500 per month
Foreman ` 4,500 per month
Stores and spares 2.5% on sales
Depreciation on machinery ` 1,26,000
Light and power (fixed) `30,000
Repairs and maintenance ` 80,000
Others sundries 10% on direct wages
Administration, selling and distribution expenses ` 3,99,000 p.a.

Ans. Master Budget for the year ending ______

Particulars (`) (`) (`)
Sales:
Acrylic finish wooden sheets 70,00,000
Lacquer finish wooden sheets 30,00,000
Total Sales 1,00,00,000
Less: Cost of production:
Direct materials (65% of ` 1,00,00,000) 65,00,000
Direct wages (25 workers × ` 1,500 × 12 months) 4,50,000
Fixed Factory Overhead:
Works manager’s salary (5,500 × 12 months) 66,000
Foreman’s salary (4,500 × 12 months) 54,000
Light and power 30,000 2,76,000
Variable Factory Overhead:
Stores and spares (2.5% of ` 1,00,00,000) 2,50,000
Repairs and maintenance 80,000
Sundry expenses 45,000 3,75,000
Works Cost 76,01,000
Gross Profit (Sales – Works cost) 23,99,000
Less: Adm., selling and distribution expenses 3,99,000
Net Profit 20,00,000
Q-20 The information of Z Ltd. for the year ended 31st March 2020 is as below:
Amount (`)
Variable factory overhead 9,50,000
Fixed factory overhead 12,00,000
Other variable costs 6,00,000
Other fixed costs 4,00,000
Profit 8,50,000
Sales 70,00,000
During the year, the company manufactured two products, X and Y, and the output and cost were:
X Y
Selling price per unit (`) 600 550
Direct material per unit (`) 140 157.50
Direct wages per unit (`) 90 132.50
Variable factory overheads are absorbed as a percentage of direct wages and other variable costs are
computed as:
Product X – ` 40 per unit and Product Y- `70 per unit.
For the FY 2020-21, due to a pandemic, it is expected that demand for product X and Y will fall by 20% &
10% respectively. It is also expected that direct wages cost will raise by 20% and other fixed costs by 10%.
Products will be required to be sold at a discount of 20%.


(i) PREPARE product- wise profitability statement on marginal costing method for the FY 2019-20 and
(ii) PREPARE a budget for the FY 2020-21.
Ans.(i) Product-wise Profitability Statement for the FY 2019-20:
Particulars Product-X (`) Product-Y (`) Total (`)
Selling price per unit 600 550
Sales value 48,00,000 22,00,000 70,00,000
Direct material 11,20,000 6,30,000 17,50,000
(`140×8,000) (`157.50×4,000)
Direct wages 7,20,000 5,30,000 12,50,000
(`90×8,000) (`132.5×4,000)
Variable factory overheads 5,47,200 4,02,800 9,50,000
(76%of 7,20,000) (76%of 5,30,000)
Other variable costs 3,20,000 2,80,000 6,00,000
(`40×8,000) (`70×4,000)
Contribution 20,92,800 3,57,200 24,50,000
Fixed factory overheads - - 12,00,000
Other fixed costs - - 4,00,000
Profit 8,50,000
(ii) Preparation of Budget for the FY 2020-21:
Particulars Product-X (`) Product-Y (`) Total (`)
(8,000×80%) (4,000×90%)
Selling price per unit 480 440
(600×80%) (550×80%)
Sales value 30,72,000 15,84,000 46,56,000
Direct material 8,96,000 5,67,000 14,63,000
(`140×6,400) (`157.50×3,600)
Direct wages per unit 6,91,200 5,72,400 12,63,600
(`108×6,400) (`159×3,600)
Variable factory overheads 5,25,312 4,35,024 9,60,336
(76%of 6,91,200) (76%of 5,72,400)
Other variable costs 2,56,000 2,52,000 5,08,000
(‘40×6,400) (‘70×3,600)
Contribution 7,03,488 (2,42,424) 4,61,064
Fixed factory overheads - - 12,00,000
Other fixed costs (110%of - - 4,40,000
`4,00,000)
Profit/ (Loss) (11,78,936)

Q-21 A factory can produce 1,80,000 units per annum at its 60% capacity. The estimated costs of production
are as under:
Direct material ` 50 per unit
Direct employee cost ` 16 per unit
Indirect expenses:
- Fixed ` 32,50,000 per annum
- Variable ` 10 per unit
- Semi-variable ` 40,000 per month up to 50% capacity and ` 15,000 for
every 20% increase in the capacity or part thereof.
If production program of the factory is as indicated below and the management desires to ensure a
profit of ` 10,00,000 for the year, DETERMINE the average selling price at which each unit should be
quoted:
First three months of the year- 50% of capacity;
Remaining nine months of the year- 75% of capacity.
Ans. Statement of Cost
First three Remaining nine Total (`)
months (`) months (`)
37,500 1,68,750 units 2,06,250 units
units
Direct material 18,75,000 84,37,500 1,03,12,500
Direct employee cost 6,00,000 27,00,000 33,00,000
Indirect- variable expenses 3,75,000 16,87,500 20,62,500
Indirect – fixed expenses 8,12,500 24,37,500 32,50,000
Indirect- semi-variable expenses
- For first three months @ ` 1,20,000 1,20,000
40,000 p.m.
- For remaining nine months @ 6,30,000 6,30,000
` 70,000* p.m.
Total cost 37,82,500 1,58,92,500 1,96,75,000
Desired profit - - 10,00,000
Sales value - - 2,06,75,000
Average selling price per unit 100.24
* ` 40,000 for 50% capacity + `15,000 for 20% increase in capacity + ` 15,000 for 5% increase in capacity
(because cost is increased for every 20% increase in capacity or part thereof)
Q-22 T Ltd manufactures and sells a single product and has estimated sales revenue of ` 1,51,20,000 during
the year based on 20% profit on selling price. Each unit of product requires 6 kg of material A and 3 kg
of material B and processing time of 4 hours in machine shop and 2 hours in assembly shop. Factory
overheads are absorbed at a blanket rate of 20% of direct labour. Variable selling & distribution overheads
are ` 30 per unit sold and fixed selling & distribution overheads are estimated to be ` 34,56,000.
The other relevant details are as under:
Purchase Price: Material A ` 80 per kg
Materials B ` 50 per kg
Labour Rate: Machine Shop ` 70 per hour
Assembly Shop ` 35 per hour

Finished Stock Material A Material B

Opening Stock 2,500 units 7,500 kg 4,000 kg
Closing Stock 3,000 units 8,000 kg 5,500 kg
Required
(i) CALCULATE number of units of product proposed to be sold and selling price per unit,
(ii) PREPARE Production Budget in units and
(iii) PREPARE Material Purchase Budget in units.
Ans. Workings
Statement Showing “Total Variable Cost for the year”
Particulars Amount
(` )
Estimated Sales Revenue 1,51,20,000
Less: Desired Profit Margin on Sale @ 20% 30,24,000
Estimated Total Cost 1,20,96,000
Less: Fixed Selling and Distribution Overheads 34,56,000
Total Variable Cost 86,40,000
Statement Showing “Variable Cost per unit”
Particulars Variable Cost
p.u. (`)
Direct Materials:
A: 6 Kg. @ ` 80 per kg. 480
B: 3 Kg. @ ` 50 per kg. 150
Labour Cost:
Machine Shop: 4 hrs. @ ` 70 per hour 280
Assembly Shop: 2 hrs. @ ` 35 per hour 70
Factory Overheads: 20% of ( ` 280 + ` 70) 70
Variable Selling & Distribution Expenses 30
Total Variable Cost per unit 1,080
(i) Calculation of number of units of product proposed to be sold and selling price per unit:
Number of Units Sold = Total Variable Cost / Variable Cost per unit
= ` 86,40,000 / ` 1,080
= 8,000 units
Selling Price per unit = Total Sales Value / Number of Units Sold
= ` 1,51,20,000 / 8,000 units
= ` 1,890
(ii) Production Budget (units)
Particulars Units
Add: Closing Stock 3,000
Less: Opening Stock (2,500)

(iii) Materials Purchase Budget (Kg.)

Particulars Material Material
A B
Requirement for Production 51,000 25,500
(8,500 units × 6 Kg.) (8,500 units × 3 Kg.)
Add: Desired Closing Stock 8,000 5,500
Total Requirements 59,000 31,000
Less: Opening Stock (7,500) (4,000)
Q-23 DESCRIBE the salient features of budget manual.
Ans. Salient features of Budget Manual
• Budget manual contains much information which is required for effective budgetary planning.
• A budget manual is a collection of documents that contains key information for those involved in
the planning process.
• An introductory explanation of the budgetary planning and control process, including a statement
of the budgetary objective and desired results is included in Budget Manual
• Budget Manual contains a form of organisation chart to show who is responsible for the preparation
of each functional budget and the way in which the budgets are interrelated.
• In contains a timetable for the preparation of each budget.
• Copies of all forms to be completed by those responsible for preparing budgets, with explanations
concerning their completion is included in Budget Manual.
Q-24 DEFINE Zero Based Budgeting and mention its various stages.
Ans. Zero-based Budgeting: (ZBB) is an emergent form of budgeting which arises to overcome the limitations
of incremental (traditional) budgeting system. Zero- based Budgeting (ZBB) is defined as ‘a method of
budgeting which requires each cost element to be specifically justified, although the activities to
which the budget relates are being undertaken for the first time, without approval, the budget
allowance is zero’.
ZBB is an activity based budgeting system where budgets are prepared for each activities rather than
functional department. Justification in the form of cost benefits for the activity is required to be given.
The activities are then evaluated and prioritized by the management on the basis of factors like
synchronisation with organisational objectives, availability of funds, regulatory requirement etc.
ZBB is suitable for both corporate and non-corporate entities. In case of non-corporate entities like
Government department, local bodies, not for profit organisations, where these entities need to
justify the benefits of expenditures on social programmes like mid-day meal, installation of street
lights, provision of drinking water etc.
ZBB involves the following stages:
(i) Identification and description of Decision packages
(ii) Evaluation of Decision packages
(iii) Ranking (Prioritisation) of the Decision packages
(iv) Allocation of resources
Q-25 PSV Ltd. manufactures and sells a single product and estimated the following related information for
the period November, 2020 to March, 2021.

Particulars November, December, January, February, March,

2020 2020 2021 2021 2021
Opening Stock of 7,500 3,000 9,000 8,000 6,000
Finished Goods (in
Units)
Sales (in Units) 30,000 35,000 38,000 25,000 40,000

Selling Price per unit (in ` ) 10 12 15 15 20
Additional Information:
• Closing stock of finished goods at the end of March, 2021 is 10,000 units.
• Each unit of finished output requires 2 kg of Raw Material ‘A’ and 3 kg of Raw Material ‘B’.
You are required to prepare the following budgets for the period November, 2020 to March, 2021 on
monthly basis:
(i) Sales Budget (in ` )
(ii) Production budget (in units) and
(iii) Raw material Budget for Raw material ‘A’ and ‘B’ separately (in units)
Ans. (i) Sales Budget (in ` )
Particulars Nov, 20 Dec, 20 Jan, 21 Feb, 21 Mar, 21 Total
Sales (in Units) 30,000 35,000 38,000 25,000 40,000 1,68,000
Selling Price per
unit (` ) 10 12 15 15 20 -
Total Sales (` ) 3,00,000 4,20,000 5,70,000 3,75,000 8,00,000 24,65,000
(ii) Production Budget (in units)
Sales 30,000 35,000 38,000 25,000 40,000 1,68,000
Add: Closing stock of
finished goods 3,000 9,000 8,000 6,000 10,000 36,000
Total quantity required 33,000 44,000 46,000 31,000 50,000 2,04,000
Less: Opening stock of
finished goods 7,500 3,000 9,000 8,000 6,000 33,500
Units to be produced 25,500 41,000 37,000 23,000 44,000 1,70,500
(iii) Raw material budget (in units)
For Raw material ‘A’
Units to be produced: (a) 25,500 41,000 37,000 23,000 44,000 1,70,500
Raw material consumption
p.u. (kg.): (b) 2 2 2 2 2 -
Total raw material
consumption (Kg.): (a × b) 51,000 82,000 74,000 46,000 88,000 3,41,000

For Raw material ‘B’

Units to be
produced: (a) 25,500 41,000 37,000 23,000 44,000 1,70,500
Raw material
consumption p.u.
(kg.): (b) 3 3 3 3 3 -
Total raw material 76,500 1,23,000 1,11,000 69,000 1,32,000 5,11,500
consumption (Kg.):
(a × b)
Q-26 Premier Industries has a small factory where 52 workers are employed on an average for 25 days a
month and they work 8 hours per day. The normal down time is 15%. The firm has introduced standard
costing for cost control. Its monthly budget for November, 2020 shows that the budgeted variable and
fixed overhead are ` 1,06,080 and ` 2,21,000 respectively.
The firm reports the following details of actual performance for November, 2020, after the end of the
month:
Actual hours worked 8,100 hrs.
Actual production expressed in standard hours 8,800 hrs.
Actual Variable Overheads ` 1,02,000
Actual Fixed Overheads ` 2,00,000
(i) Variable Overhead Variances:
(a) Variable overhead expenditure variance.
(b) Variable overhead efficiency variance.
(ii) Fixed Overhead Variances:
(a) Fixed overhead budget variance.
(b) Fixed overhead capacity variance.
(c) Fixed overhead efficiency variance.
(iii) Control Ratios:
(a) Capacity ratio.
(b) Efficiency ratio.
(c) Activity ratio.
Ans. Workings:
Calculation of budgeted hours
Budgeted hours = (52 x 25 x 8) x 85% = 8,840 hours
(i) Variable overheads variance
(a) Variable overhead expenditure variance
= Std. overhead for Actual hours – Actual variable Overhead
= 4800 A

(b) Variable overhead efficiency variance

Std. rate per hour × (Std. hours for actual production – Actual hours)
= (8,800 hours – 8,100 hours)
= 8400 F
(ii) Fixed overhead variances
(a) Fixed overhead budget variance
= Budgeted overhead – Actual overhead
= ` 2,21,000 – ` 2,00,000
= 21,000 F
(b) Fixed overhead capacity variance
= Std rate x (Actual hours – budgeted hours)
= x (8,100 – 8,840)
= 18,500 A
(c) Fixed overhead efficiency variance
= Std rate x (Std hours for actual production – Actual hours)
= x (8,800 – 8,100)
= 17,500 F
(iii) Control Ratios
(a) Capacity Ratio
= Actual hours x 100
Budgeted hours
= 8,100 x 100 = 91.63%
8,840
(b) Efficiency Ratio
= Standard hours x 100
Actual hours
= 8,800 x 100 = 108.64 %
8,100
(c) Activity Ratio
= Standard hours x 100
Budgted hours
= 8,800 x 100 = 99.55%
8,840

Q-27 The accountant of manufacturing company provides you the following details for year 2019-20:
Particulars (`)
Fixed factory overheads 16,00,000
Variable factory overheads 16,00,000
Other variable costs 12,80,000
Other fixed costs 12,80,000
Profit 18,40,000
Sales 1,20,00,000
During the year, the company manufactured two products A and B and the output and costs were:
Particulars A B
Output (units) 2,00,000 1,00,000
Selling price per unit ` 32.00 ` 56.00
Direct materials per unit ` 8.00 ` 12.00
Direct wages per unit ` 4.00 ` 8.00
Variable factory overhead is absorbed as a percentage of direct wages. Other variable costs have been
computed as: Product A ` 4.00 per unit; and B ` 4.80 per unit.
During 2020-21, it is expected that the demand for product A will fall by 25% and for B by 50%. It is
decided to manufacture a new product C, the cost for which is estimated as follows:
Particulars Product C
Output (units) 2,00,000
Selling price per unit ` 28.00
Direct materials per unit ` 6.40
Direct wages per unit ` 4.00
It is anticipated that the other variable costs per unit of Product C will be same as for product A.
PREPARE a budget to present to the management, showing the current position and the position for
2020-21. COMMENT on the comparative results.
Ans. Budget Showing Current Position and Position for 2020-21
Position for 2019-20 Position for 2020-21
A B Total A B C Total
(A+B) (A+B+C)
Sales (units) 2,00,000 1,00,000 – 1,50,000 50,000 2,00,000 –
(`) (`) (`) (`) (`) (`) (`)
(A) Sales 64,00,000 56,00,000 1,20,00,000 48,00,000 28,00,000 56,00,000 1,32,00,000
Direct Material 16,00,000 12,00,000 28,00,000 12,00,000 6,00,000 12,80,000 30,80,000
Direct wages 8,00,000 8,00,000 16,00,000 6,00,000 4,00,000 8,00,000 18,00,000
Factory overhead
(variable) 8,00,000 8,00,000 16,00,000 6,00,000 4,00,000 8,00,000 18,00,000
Other variable costs 800,000 4,80,000 12,80,000 6,00,000 240,000 8,00,000 16,40,000
(B) Marginal Cost 40,00,000 32,80,000 72,80,000 30,00,000 16,40,000 36,80,000 83,20,000
(C) Contribution (AB)
24,00,000 23,20,000 47,20,000 18,00,000 11,60,000 19,20,000 48,80,000

Fixed costs
– Factory 16,00,000 16,00,000
– Others 12,80,000 12,80,000
(D) Total fixed cost 28,80,000 28,80,000
Profit (C – D) 18,40,000 20,00,000
Comments: Introduction of Product C is likely to increase profit by ` 1,60,000 (i.e. from ` 18,40,000 to
` 20,00,000) in 2020-21 as compared to 2019-20 even if the demand for Product A & B falls. Therefore,
introduction of product C is recommended.
Q-28 RS Ltd manufactures and sells a single product and has estimated sales revenue of ` 302.4 lakh during
the year based on 20% profit on selling price. Each unit of product requires 6 kg of material A and 3 kg
of material B and processing time of 4 hours in machine shop and 2 hours in assembly shop. Factory
overheads are absorbed at a blanket rate of 20% of direct labour. Variable selling & distribution overheads
are ` 60 per unit sold and fixed selling & distribution overheads are estimated to be ` 69,12,000.
The other relevant details are as under:
Purchase Price: Material A ` 160 per kg
Materials B ` 100 per kg
Labour Rate: Machine Shop ` 140 per hour
Assembly Shop ` 70 per hour
Finished Stock Material A Material B
Opening Stock 2,500 units 7,500 kg 4,000 kg
Closing Stock 3,000 units 8,000 kg 5,500 kg
Required:
(i) CALCULATE number of units of product proposed to be sold and selling price per unit,
(ii) PREPARE Production Budget in units, and
(iii) PREPARE Material Purchase Budget in units.
Ans. Workings:
Statement Showing “Total Variable Cost for the year”
Particulars Amount
(` )
Estimated Sales Revenue 3,02,40,000
Less: Desired Profit Margin on Sale @ 20% 60,48,000
Estimated Total Cost 2,41,92,000
Less: Fixed Selling and Distribution Overheads 69,12,000
Total Variable Cost 1,72,80,000
Statement Showing “Variable Cost per unit”
Particulars Variable Cost
p.u. (`)
Direct Materials:
A: 6 Kg. @ ` 160 per kg. 960
B: 3 Kg. @ ` 100 per kg. 300

Labour Cost:
Machine Shop: 4 hrs. @ ` 140 per hour 560
Assembly Shop: 2 hrs. @ ` 70 per hour 140
Factory Overheads: 20% of (` 560 + ` 140) 140
Variable Selling & Distribution Expenses 60
Total Variable Cost per unit 2,160
(i) Calculation of number of units of product proposed to be sold and selling price per unit:
Number of Units Sold = Total Variable Cost / Variable Cost per unit
= ` 1,72,80,000 / ` 2,160
= 8,000 units
Selling Price per unit = Total Sales Value / Number of Units Sold
= ` 3,02,40,000 / 8,000 units
= ` 3,780
(ii) Production Budget (units)
Particulars Units
Add: Closing Stock 3,000
Less: Opening Stock (2,500)
(iii) Materials Purchase Budget (Kg.)
Particulars Material Material
A B
Requirement for Production 51,000 25,500
(8,500 units × 6 Kg.) (8,500 units × 3 Kg.)
Add: Desired Closing Stock 8,000 5,500
Total Requirements 59,000 31,000
Less: Opening Stock (7,500) (4,000)
Q-29 G Ltd. manufactures a single product for which market demand exists for additional quantity. Present
sales of ` 6,00,000 utilises only 60% capacity of the plant. The following data are available:
(1) Selling price : ` 100 per unit
(2) Variable cost : ` 30 per unit
(3) Semi-variable expenses : ` 60,000 fixed + ` 5 per unit
(4) Fixed expenses : ` 1,00,000 at present level,
estimated to increase by 25% at
and above 80% capacity.
You are required to prepare a flexible budget so as to arrive at the operating profit at 60%, 80% and
100% levels.
Ans. Flexible Budget
Activity Level 60% 80% 100%

(` ) (` ) (` )
Sales @ ` 100 per unit 6,00,000 8,00,000 10,00,000
Variable Cost
(@ ` 35 (` 30 + ` 5) per unit) 2,10,000 2,80,000 3,50,000
Contribution (A) 3,90,000 5,20,000 6,50,000
Fixed Cost (part of semi-variable cost) 60,000 60,000 60,000
Other Fixed Cost 1,00,000 1,25,000 1,25,000
Total Fixed Cost (B) 1,60,000 1,85,000 1,85,000
Operating Profit (A – B) 2,30,000 3,35,000 4,65,000
Q-30 State the limitations of Budgetary Control System.
Ans. Limitations of Budgetary Control System
Points Description
1. Based on Estimates Budgets are based on a series of estimates, which are
based on the conditions prevalent or expected at the
time budget is established. It requires revision in plan
if conditions change.
2. Time factor Budgets cannot be executed automatically. Some
preliminary steps are required to be accomplished
before budgets are implemented. It requires proper
attention and time of management. Management must
not expect too much during the initial development
period.
3. Co-operation Required Staff co-operation is usually not available during the
initial budgetary control exercise. In a decentralised
organisation, each unit has its own objective and
these units enjoy some degree of discretion. In this
type of organisation structure, coordination among
different units is required. The success of the
budgetary control depends upon willing co-operation
and teamwork,
4. Expensive The implementation of budget is somewhat expensive.
For successful implementation of the budgetary
control, proper organisation structure with
responsibility is prerequisite. Budgeting process start
from the collection of information to for preparing the
budget and performance analysis. It consumes
valuable resources (in terms of qualified manpower,
equipment, etc.) for this purpose; hence, it is an
expensive process.

5. Not a substitute for Budget is only a managerial tool and must be

management intelligently applied for management to get benefited.
Budgets are not a substitute for good management.
6. Rigid document Budgets are sometime considered as rigid documents.
But in reality, an organisation is exposed to various
uncertain internal and external factors. Budget should
be flexible enough to incorporate ongoing
developments in the internal and external factors
affecting the very purpose of the budget.
Q-31 What are the important points an organization should consider if it wants to adopt Performance
Budgeting?
Ans. For an enterprise that wants to adopt Performance Budgeting, it is thus imperative that:
• the objectives of the enterprise are spelt out in concrete terms.
• the objectives are then translated into specific functions, programmes, activities and tasks for
different levels of management within the realities of fiscal constraints.
• realistic and acceptable norms, yardsticks or standards and performance indicators should be
evolved and expressed in quantifiable physical units.
• a style of management based upon decentralised responsibility structure should be adopted, and
• an accounting and reporting system should be developed to facilities monitoring, analysis and
review of actual performance in relation to budgets.
Q-32 Maharatna Ltd., a public sector undertaking (PSU), produces product A. The company is in process of
preparing its revenue budget for the year 2022. The company has the following information which can
be useful in preparing the budget:
(i) It has anticipated 12% growth in sales volume from the year 2021 of 4,20,000 tonnes.
(ii) The sales price of `23,000 per tonne will be increased by 10% provided Wholesale Price Index
(WPI) increases by 5%.
(iii) To produce one tonne of product A, 2.3 tonnes of raw material are required. The raw material cost
is `4,500 per tonne. The price of raw material will also increase by 10% if WPI increase by 5%.
(iv) The projected increase in WPI for 2022 is 4%
(v) A total of 6,000 employees works for the company. The company works 26 days in a month.
(vi) 85% of employees of the company are permanent and getting salary as per 5- year wage agreement.
The earnings per manshift (means an employee cost for a shift of 8 hours) is ` 3,000 (excluding
terminal benefits). The new wage agreement will be implemented from 1st July 2022 and it is
expected that a 15% increase in pay will be given.
(vii) The casual employees are getting a daily wage of ` 850. The wages in linked to Consumer Price
Index (CPI). The present CPI is 165.17 points and it is expected to be 173.59 points in year 2022.
(viii) Power cost for the year 2021 is ` 42,00,000 for 7,00,000 units (1 unit = 1 Kwh). 60% of power is used
for production purpose (directly related to production volume) and remaining are for employee
quarters and administrative offices.
(ix) During the year 2021, the company has paid ` 60,00,000 for safety and maintenance works. The
amount will increase in proportion to the volume of production.

(x) During the year 2021, the company has paid ` 1,20,000 for the purchase of diesel to be used in car
hired for administrative purposes. The cost of diesel will increase by 15% in year 2022.
(xi) During the year 2021, the company has paid ` 6,00,000 for car hire charges (excluding fuel cost). In
year 2022, the company has decided to reimburse the diesel cost to the car rental company. Doing
this will attract 5% GST on Reverse Charge Mechanism (RCM) basis on which the company will not
get GST input credit.
(xii) Depreciation on fixed assets for the year 2021 is ` 80,40,00,000 and it will be 15% lower in 2022.
Required:
From the above information PREPARE Revenue (Flexible) budget for the year 2022 and also show the
budgeted profit/ loss for the year.
Ans. Revenue Budget (Flexible Budget) of Maharatna Ltd. for the Year 2022
Particulars PY 2021 CY 2022
A Sales Volume (Tonnes) 4,20,000 4,70,400
[112%×4,20,000]
B Selling Price per tonne (`) 23,000 23,000
(` in lakh) (` in lakh)
C Sales value [A×B] 96,600 1,08,192
D Raw material Cost:
(i) Qty. of Material 9,66,000 10,81,920
[2.3 tonnes × A] (tonnes)
(ii) Price per tonne (`) 4,500 4,500
(iii) Total raw material cost (` in lakh) [(i)×(ii)] 43,470 48,686.40
E Wages & Salary Cost:
(i) Wages to casual employees
(15% × 6,000 = 900 employees) 2,386.80 2,508.47
[900 × 26 × 12 × ` 850] [900 × 26 × 12 × ` 893.33]
(ii) Salary to permanent employees 47,736 51,316.20
(85% × 6,000 = 5,100 employees) [5100 × 26 × 12 × [(5100 × 26 × 6 ×
` 3,000] ` 3,000) +
(5100 × 26 × 6
× ` 3,450)]
(iii) Total wages & salary [(i)+(ii)] 50,122.80 53,824.67
F Power cost:
(i) For production (units) 4,20,000 4,70,400
[60% × 7,00,000] [112% × 4,20,000]
(ii) For employees & offices (units)
[40% × 7,00.000] 2,80,000 2,80,000
(iii) Total Power consumption (units) [(i)+(ii)] 7,00,000 7,50,400

(iv) Power rate per unit (`) [`42,00,000 ÷ 7,00,000] 6.00 6.00
(v) Total power cost [(iii)×(iv)] 42 45.024
G Safety and maintenance Cost 60 67.20
[112% × 60,00,000]

H Diesel cost 1.2 -

I Car Hire charge:
(i) Car hire charge 6 6
(ii) Fuel reimbursement cost - 1.38
[115% × 1.2]
(iii) GST@5% on RCM basis
[5%×(i+ii)] - 0.369
(iv) Total Car hire charge cost [(i)+(ii)+(iii)] 6 7.749
J Depreciation 8,040 6,834
[85% × 8040]
K Total Cost [Sum of D to J] 1,01,742 1,09,465.043
L Profit/ (Loss) [C-L] (5,142) (1273.043)
Q-33 The Accountant of KPMR Ltd. has prepared the following budget for the coming year 2022 for its two
products ‘AYE’ and ‘ZYE’:
Particulars Product ‘AYE’ Product ‘ZYE’
Production and Sales (in Units) 4,000 3,000
Amount (in `) Amount (in `)
Direct Material per unit 80 70
Direct Labour per unit 40 35
Variable Overhead per unit 20 25
Fixed Overhead per unit 10 10
After reviewing the above budget, the management has called the marketing team for suggesting
some measures for increasing the sales. The marketing team has suggested that by promoting the
products on social media, the sales quantity of both the products can be increased by 5%. Also, the
selling price per unit will go up by 10%. But this will result in increase in expenditure on variable
overhead and fixed overhead by 20% and 5% respectively for both the products.
You are required to prepare flexible budget for both the products:
(i) Before promotion on social media,
(ii) After promotion on social media.
Ans.(i) Flexible Budget (before promotion)
Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales (units) 4,000 3,000
Amount (`) Amount (`) Amount (`)
A. Sales Value 8,00,000 5,40,000 13,40,000
(` 200×4,000) (` 180×3,000)
B. Direct Materials 3,20,000 2,10,000 5,30,000
(` 80 × 4,000) (`70 × 3,000)
C. Direct labour 1,60,000 1,05,000 2,65,000
(` 40 × 4,000) (` 35 × 3,000)

D. Variable Overheads 80,000 75,000 1,55,000

(` 20 × 4,000) (` 25 × 3,000)
E. Total Variable Cost (B+C+D) 5,60,000 3,90,000 9,50,000
F. Contribution (A-E) 2,40,000 1,50,000 3,90,000
G. Fixed Overhead 40,000 30,000 70,000
(`10 × 4,000) (`10 × 3,000)
H. Profit (F-G) 2,00,000 1,20,000 3,20,000
Profit per unit 50 40
(ii) Flexible Budget (after promotion)
Particulars Product ‘AYE’ Product ‘ZYE’ Total
Production & Sales (units) 4,200 3,150
(4,000×105%) (3,000×105%)
Amount (`) Amount (`) Amount (`)
A. Sales Value 9,24,000 6,23,700 15,47,700
(` 220 × 4,200) (` 198 × 3,150)
B. Direct Materials 3,36,000 2,20,500 5,56,500
(` 80 × 4,200) (` 70 × 3,150)
C. Direct labour 1,68,000 1,10,250 2,78,250
(` 40 × 4,200) (` 35 × 3,150)
D. Variable Overheads 1,00,800 94,500 1,95,300
(` 24 × 4,200) (` 30 × 3,150)
E. Total Variable Cost (B+C+D) 6,04,800 4,25,250 10,30,050
F. Contribution (A-E) 3,19,200 1,98,450 5,17,650
G. Fixed Overhead 42,000 31,500 73,500
(` 40,000 × 105%) (` 30,000 × 105%)
H. Profit (F-G) 2,77,200 1,66,950 4,44,150

Profit per unit 66 53
Q-34 F Ltd. requires you to PREPARE the Master budget for the next year from the following information:
Sales ` 1,20,00,000
Direct material cost 60% of sales
Direct wages 20 workers @ ` 2,250 per month
Factory overheads:
Indirect labour –
Works manager ` 7,500 per month
Foreman ` 6,000 per month
Stores and spares 2.5% on sales
Depreciation on machinery ` 1,89,000
Light and power (fixed) ` 45,000
Repairs and maintenance ` 1,20,000
Other sundries 10% on direct wages
Administration, selling and distribution expenses ` 5,40,000 per year
538 Chapter-15 : Budget & Budgetary Control

Ans. Master Budget for the year ending _____

Sales 1,20,00,000
Less: Cost of production:
Direct materials (60% of ` 1,20,00,000) 72,00,000
Direct wages (20 workers × ` 2,250 × 12 months) 5,40,000
Fixed Factory Overhead:
Works manager’s salary (7,500 × 12) 90,000
Foreman’s salary (6,000 × 12) 72,000
Light and power 45,000 3,96,000
Variable Factory Overhead:
Stores and spares (2.5% of ` 1,20,00,000) 3,00,000
Repairs and maintenance 1,20,000
Sundry expenses (10% of ` 5,40,000) 54,000 4,74,000
Works Cost 86,10,000
Gross Profit (Sales – Works cost) 33,90,000
Less: Adm., selling and distribution expenses 5,40,000
Net Profit 28,50,000
Q-35 Comput Ltd. has capacity to produce 1,00,000 units of a product every month. Its fixed general
administration expenses amount to ` 7,50,000 and fixed marketing expenses amount to ` 12,50,000
per month respectively. The variable distribution cost amounts to ` 150 per unit.
Its works cost at varying levels of production is as under:
Level Works cost per unit (`)
10% 2,000
20% 1,950
30% 1,900
40% 1,850
50% 1,800
60% 1,750
70% 1,700
80% 1,650
90% 1,600
100% 1,550
It can sell 100% of its output at ` 2,500 per unit provided it incurs the following additional expenditure:
(i) it spends ` 5,00,000 on refreshments served every month to its customers;
(ii) it gives gift items costing ` 150 per unit of sale;
(iii) it sponsors a television programme every week at a cost of ` 1,00,00,000 per month.
(iv) it has lucky draws every month giving the first prize of ` 2,50,000; 2nd prize of ` 1,25,000, 3rd prize
of ` 50,000 and three consolation prizes of ` 25,000 each to customers buying the product.
However, it can market 30% of its output at ` 2,750 per unit without incurring any of the expenses
referred to in (i) to (iv) above.

PREPARE a cost sheet for the month showing total cost and profit at 30% and 100% capacity level.
Ans. Cost Sheet (For the month)
Level of Capacity 30% 100%
30,000 units 1,00,000 units
Per unit (`) Total (`) Per unit (`) Total (`)
Works Cost 1,900.00 5,70,00,000 1,550.00 15,50,00,000
Add: Fixed general administration
expenses 25.00 7,50,000 7.50 7,50,000
Add: Fixed marketing expenses 41.67 12,50,000 12.50 12,50,000
Add: Variable distribution cost 150.00 45,00,000 150.00 1,50,00,000
Add: Special Costs:
- Refreshments - - 5.00 5,00,000
- Gift items costs - - 150.00 1,50,00,000
- Television programme
sponsorship cost - - 100.00 1,00,00,000
- Customers’ prizes* - - 5.00 5,00,000
Cost of sales 2,116.67 6,35,00,000 1,980.00 19,80,00,000
Profit (Balancing figure) 633.33 1,90,00,000 520.00 5,20,00,000
Sales revenue2,750.00 8,25,00,000 2,500.00 25,00,00,000
*Customers’ prize cost: Amount (`)
1st Prize 2,50,000
2nd Prize 1,25,000
3rd Prize 50,000
Consolation Prizes (3 × ` 25,000) 75,000
Total 5,00,000
---0---0---

CHAPTER-16
MISCELLANEOUS TOPICS
Q-1
(a) DIFFERENTIATE between Cost Accounting and Management Accounting.
(b) DISCUSS the impact of Information Technology (IT) on cost accounting system.
(c) DISCUSS the Escalation Clause in a Contract.
(d) DISCUSS the treatment of by-product cost in cost accounting.
Ans.(a) Difference between Cost Accounting and Management Accounting
(i) Nature It records the quantitative It records both qualitative and
aspect only. quantitative aspect.
(ii) Objective It records the cost of It Provides information to management
producing a product and for planning and co-ordination.
providing a service.
(iii) Area It only deals with cost It is wider in scope as it includes financial
Ascertainment. accounting,budgeting,taxation, planning etc.
(iv) Recording It uses both past and It is focused with the projection of figures
of data present figures. for future.
(v) Development Its development is related to It develops in accordance to the need of
industrial revolution. modern business world.
(vi) Rules and It follows certain principles It does not follow any specific rules and
Regulation and procedures for recording regulations.
costs of different products.
(b) The impact of IT in cost accounting system may include the following:
(ii) A move towards paperless environment can be seen where documents like Bill of Material,
Material Requisition Note, Goods Received Note, labour utilisation report etc. are no longer
required to be prepared in multiple copies, the related department can get e-copy from the
system.

(iii) Information Technology with the help of internet (including intranet and extranet) helps in
resource procurement and mobilisation. For example, production department can get materials
from the stores without issuing material requisition note physically. Similarly, purchase orders
can be initiated to the suppliers with the help of extranet. This enables an entity to shift towards
Just-in-Time (JIT) approach of inventory management and production.
(iv) Cost information for a cost centre or cost object is ascertained with accuracy in timely manner.
Each cost centre and cost object is codified and all related costs are assigned to the cost object or
cost centre. This process automates the cost accumulation and ascertainment process. The cost
information can be customised as per the requirement. For example, when an entity manufacture
or provide services, it can know information job-wise, batch-wise, process-wise, cost centre wise
etc.
closely to eliminate non value added activities.
The above are examples of few areas where Cost Accounting is done with the help of IT.
(c) Escalation clause in a contract empowers a contractor to revise the price of the contract in case of
increase in the prices of inputs due to some macro-economic or other agreed reasons. A contract takes
longer period to complete and the factors based on which price negotiation is done at the time of
entering into the contract may change till the contract completes. This protect the contractor from
adverse financial impacts and empowers the contractor to recover the increased prices. As per this
clause, the contractor increases the contract price if the cost of materials, employees and other expenses
increase beyond a certain limit. Inclusion of such a clause in a contract deed is called an “Escalation
Clause”.
(d) By-product cost can be dealt in cost accounting in the following ways:
(i) When they are of small total value: When the by-products are of small total value, the amount
realised from their sale may be dealt in any one the following two ways:
1. The sales value of the by-products may be credited to the Costing Profit and Loss Account
and no credit be given in the Cost Accounts. The credit to the Costing Profit and Loss Account
here is treated either as miscellaneous income or as additional sales revenue.
2. The sale proceeds of the by-product may be treated as deductions from the total costs. The
sale proceeds in fact should be deducted either from the production cost or from the cost of
sales.
(ii) When the by-products are of considerable total value: Where by-products are of considerable
total value, they may be regarded as joint products rather than as by-products. To determine
exact cost of by-products the costs incurred upto the point of separation, should be apportioned
over by-products and joint products by using a logical basis. In this case, the joint costs may be
divided over joint products and by-products by using relative market values; physical output
method (at the point of split off) or ultimate selling prices (if sold).
(iii) Where they require further processing: In this case, the net realisable value of the by-product at
the split-off point may be arrived at by subtracting the further processing cost from the realisable
value of by-products.
542- Chapter-16 : Miscellaneous Topics

If total sales value of by-products at split-off point is small, it may be treated as per the provisions
discussed above under (i).
In the contrary case, the amount realised from the sale of by-products will be considerable and
thus it may be treated as discussed under (ii).
Q-2
(i) DIFFERENTIATE between Cost Accounting and Management Accounting.
(ii) EXPLAIN the meaning of Budget Manual.
(iii) EXPLAIN the term Equivalent units used in process industries.
Ans. (i) Difference between Cost Accounting and Management Accounting
(i) Nature It records the It records both qualitativeand
quantitativeaspect only. quantitative aspect.
(ii) Objective It records the cost ofproducing It Provides information
a product andproviding a service. tomanagement for planningand co-
ordination.
(iii) Area It only deals with cost Ascertainment. It is wider in scope as itincludes
financialaccounting, budgeting,
taxation, planning etc.
(iv) Recording It uses both past andpresent figures. It is focused with theprojection of
of data figures forfuture.
(v) Development Its development is relatedto industrial It develops in accordanceto the need
revolution. of modernbusiness world.
(vi) Rules and It follows certain principlesand It does not follow anyspecific
Regulation procedures forrecording costs of rules andregulations.
differentproducts.
(ii) Budget Manual: A budget manual is a collection of documents that contains key information for those
involved in the planning process. Typical contents could include the following:
• An introductory explanation of the budgetary planning and control process, including a statement of
the budgetary objective and desired results.
• A form of organisation chart to show who is responsible for the preparation of each functional budget
and the way in which the budgets are interrelated.
• A timetable for the preparation of each budget. This will prevent the formation of a ‘bottleneck’ with
the late preparation of one budget holding up the preparation of all others.
• Copies of all forms to be completed by those responsible for preparing budgets, with explanations
concerning their completion.
• A list of the organization’s account codes, with full explanations of how to use them.
• Information concerning key assumptions to be made by managers in their budgets, for example the
rate of inflation, key exchange rates, etc.
(iii) Equivalent Units: Equivalent units or equivalent production units, means converting the incomplete
production units into their equivalent completed units. Under each process, an estimate is made of the
percentage completion of work-in-process with regard to different elements of costs, viz., material,
labour and overheads. It is important that the estimate of percentage of completion should be as
accurate as possible. The formula for computing equivalent completed units is:
 Actual number of unitsin   Percentage of 

Equivalent completed units =  × 
 the process of manufacture   Work completed 

For instance, if 25% of work has been done on the average of units still under process, then 200 such
units will be equal to 50 completed units and the cost of work-inprocess will be equal to the cost of 50
finished units.
Q-3 (a) DISTINGUISH between Cost Control and Cost Reduction.
(b) DISCUSS the accounting treatment of Idle time and overtime wages.
(c) DISCUSS cost classification based on variability and controllability.
Ans.
(a) Difference between Cost Control and Cost Reduction
costs in accordance with the It challenges all standards and endeavours
established standards. to better them continuously
2. Cost control seeks to attain lowest 2. Cost reduction recognises no condition as
possible cost under existing conditions. permanent, since a change will result in lower cost.
3. In case of cost control, emphasis is 3. In case of cost reduction, it is on present and future.
on past and present
4. Cost control is a preventive function 4. Cost reduction is a corrective function.
It operates even when an efficient cost control
system exists.
5. Cost control ends when targets are achieved. 5. Cost reduction has no visible end.
(b) Accounting treatment of idle time wages & overtime wages in cost accounts: Normal idle time is
treated as a part of the cost of production. Thus, in the case of direct workers, an allowance for normal
idle time is built into the labour cost rates. In the case of indirect workers, normal idle time is spread
over all the products or jobs through the process of absorption of factory overheads.
Under Cost Accounting, the overtime premium is treated as follows:
• If overtime is resorted to at the desire of the customer, then the overtime premium may be charged to
the job directly.
• If overtime is required to cope with general production program or for meeting urgent orders, the
overtime premium should be treated as overhead cost of particular department or cost center which
works overtime.
• Overtime worked on account of abnormal conditions should be charged to costing Profit & Loss Account.
• If overtime is worked in a department due to the fault of another department the overtime premium
should be charged to the latter department.
(c) Cost classification based on variability
(a) Fixed Costs – These are the costs which are incurred for a period, and which, within certain output
turnover). They do not tend to increase or decrease with the changes in output. For example,
rent, insurance of factory building etc., remain the same for different levels of production.
(b) Variable Costs – These costs tend to vary with the volume of activity. Any increase in the activity
results in an increase in the variable cost and vice-versa. For example, cost of direct labour, etc.
(c) Semi-variable Costs – These costs contain both fixed and variable components and are thus partly


(a) Controllable Costs - Cost that can be controlled, typically by a cost, profit or investment centre manager
is called controllable cost. Controllable costs incurred in a particular responsibility centre can be
influenced by the action of the executive heading that responsibility centre. For example, direct costs
comprising direct labour, direct material, direct expenses and some of the overheads are generally
controllable by the shop level management.
(b) Uncontrollable Costs - Costs which cannot be influenced by the action of a specified member of an
undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the tool
room is controllable by the foreman in-charge of that section but the share of the tool-room expenditure
which is apportioned to a machine shop is not to be controlled by the machine shop foreman.
Q-4 (a) DISCUSS the essential features of a good cost accounting system.
(b) EXPLAIN the difference between Cost Control and Control Reduction.
(c) DEFINE Controllable Cost and Uncontrollable Cost.
(d) Distiguish between job and batch costing.
Ans.
(a) The essential features, which a good cost and management accounting system should possess, are as
follows:
(i) Informative and simple: Cost and management accounting system should be tailor-made, practical,
simple and capable of meeting the requirements of a business concern. The system of costing
should not sacrifice the utility by introducing meticulous and unnecessary details.
(ii) Accurate and authentic: The data to be used by the cost and management accounting system should
be accurate and authenticated; otherwise it may distort the output of the system and a wrong
decision may be taken.
(iii) Uniformity and consistency: There should be uniformity and consistency in classification, treatment
(iv) Integrated and inclusive: The cost and management accounting system should be integrated with
other systems like financial accounting, taxation, statistics and operational research etc. to have a
complete overview and clarity in results.
(v) Flexible and adaptive: The cost and management accounting system should be flexible enough to
make necessary amendments and modification in the system to incorporate changes in technological,
reporting, regulatory and other requirements.
(vi) Trust on the system: Management should have trust on the system and its output. For this, an active
role of management is required for the development of such a system that reflect a strong conviction
in using information for decision making
(b)
costs in accordance with the established It challenges all standards and endeavours
standards. to better them continuously
2. Cost control seeks to attain lowest 2. Cost reduction recognises no condition as
possible cost under existing conditions. permanent, since a change will result in lower cost.

3. In case of cost control, emphasis is 3. In case of cost reduction, it is on present and future.
on past and present
system exists.
5. Cost control ends when targets 5. Cost reduction has no visible end.
are achieved.
(c) (i) Controllable Costs: - Cost that can be controlled, typically by a cost, profit or investment centre
manager is called controllable cost. Controllable costs incurred in a particular responsibility centre can
be influenced by the action of the executive heading that responsibility centre. For example, direct
costs comprising direct labour, direct material, direct expenses and some of the overheads are generally
controllable by the shop level management.
undertaking are known as uncontrollable costs. For example, expenditure incurred by, say, the tool
room is controllable by the foreman in-charge of that section but the share of the tool-room expenditure
which is apportioned to a machine shop is not to be controlled by the machine shop foreman.
(d) Distinction between Job and Batch Costing:
Sr. No Job Costing Batch Costing
1 Method of costing used for non- standard Homogeneous products produced in a
and non- repetitive products produced continuous production flow in lots.
as per customer specifications and against
specific orders.
2 Cost determined for each Job Cost determined in aggregate for the entire Batch
and then arrived at on per unit basis.
3 Jobs are different from each other and Products produced in a batch are homogeneous
independent of each other. and lack of individuality
Each Job is unique.
Q-5
(i) Discuss on (a) Discretionary Cost Centre and (b) Investment Centre
(ii) Describe the three advantages of Cost-plus contract.
(iii) State the advantages of Zero-based budgeting.
(iv) Describe Operation costing with two examples of industries where operation costing is applied.
15. (i) (a) Discretionary Cost Centre: The cost centre whose output cannot be measured in financial terms,
thus input -output ratio cannot be defined. The cost of input is compared with allocated budget for the
activity. Example of discretionary cost centres are Research & Development department, Advertisement
department where output of these department cannot be measured with certainty and co -related
with cost incurred on inputs.
(b) Investment Centres: These are the responsibility centres which are not only responsible for profitability
but also has the authority to make capital investment decisions. The performance of these responsibility
centres are measured on the basis of Return on Investment (ROI) besides profit. Examples of
investment centres are Maharatna, Navratna and Miniratna companies of Public Sector Undertakings
of Central Government.

(ii) Cost plus contracts have the following advantages:

(a) The Contractor is assured of a fixed percentage of profit. There is no risk of incurring any loss on
the contract.
(b) It is useful specially when the work to be done is not definitely fixed at the time of making the
estimate.
(c) Contractee can ensure himself about ‘the cost of the contract’, as he is empowered to examine
the books and docu ments of the contractor to ascertain the veracity of the cost of the contract.
(iii) The advantages of zero-based budgeting are as follows:
• It provides a systematic approach for the evaluation of different activiti es and rank them in order
of preference for the allocation of scarce resources.
• It ensures that the various functions undertaken by the organization are critical for the achievement
of its objectives and are being performed in the best possible way.
• It provides an opportunity to the management to allocate resources for various activities only
after having a thorough cost -benefit-analysis. The chances of arbitrary cuts and enhancement
are thus avoided.
• The areas of wasteful expenditure can be easily identifi ed and eliminated.
• Departmental budgets are closely linked with corporation objectives.
• The technique can also be used for the introduction and implementation of the system of
‘management by objective.’ Thus, it cannot only be used for fulfillment of the objectives of
traditional budgeting but it can also be used for a variety of other purposes.
(iv) This product costing system is used when an entity produces more than one variant of final product
using different materials but with similar conversion activities. Which means conversion activities are
similar for all the product variants but materials differ significantly. Operation Costing method is also
known as Hybrid product costing system as materials costs are accumulated by job order or batch wise
but conversion costs i.e. labour and overheads costs are accumulated by department, and process
costing methods are used to assign these costs to products. Moreover, under operation costing,
conversion costs are applied to products using a predetermined application rate. This predetermined
rate is based on budgeted conversion costs.
The two example of industries are Ready made garments and Jewellery making.
Q-6(a) DISCUSS short notes on (i) Discretionary Cost Centre and (ii) Investment Centre
(b) DESCRIBE the three advantages of Cost-plus contract.
(c) STATE the advantages of Zero-based budgeting.
(d) DESCRIBE Operation costing with two examples of industries where operation costing is applied.
Ans.(a) (i)Discretionary Cost Centre: The cost centre whose output cannot be measured in financial terms, thus
input-output ratio cannot be defined. The cost of input is compared with allocated budget for the
activity. Example of discretionary cost centres are Research & Development department, Advertisement
department where output of these department cannot be measured with certainty and co-related
with cost incurred on inputs.
(ii) Investment Centres: These are the responsibility centres which are not only responsible for profitability
but also has the authority to make capital investment decisions. The performance of these responsibility
centres are measured on the basis of Return on Investment (ROI) besides profit. Examples of investment
centres are Maharatna, Navratna and Miniratna companies of Public Sector Undertakings of Central
Government.

(b) Advantages of Cost plus contracts are as follows:

(i) The Contractor is assured of a fixed percentage of profit. There is no risk of incurring any loss on
the contract.
estimate.
(iii) Contractee can ensure himself about ‘the cost of the contract’, as he is empowered to examine
the books and documents of the contractor to ascertain the veracity of the cost of the contract.
(c) The advantages of zero-based budgeting are as follows:
• It provides a systematic approach for the evaluation of different activities and ranks them in
order of preference for the allocation of scarce resources.
• It ensures that the various functions undertaken by the organization are critical for the
achievement of its objectives and are being performed in the best possible way.
• It provides an opportunity to the management to allocate resources for various activities only
after having a thorough cost-benefit-analysis. The chances of arbitrary cuts and enhancement
are thus avoided.
• The areas of wasteful expenditure can be easily identified and eliminated.
• Departmental budgets are closely linked with corporation objectives.
• The technique can also be used for the introduction and implementation of the system of
‘management by objective.’ Thus, it cannot only be used for fulfillment of the objectives of
traditional budgeting but it can also be used for a variety of other purposes.
(d) This product costing system is used when an entity produces more than one variant of final
product using different materials but with similar conversion activities. This means conversion
activities are similar for all the product variants but materials differ significantly. Operation
Costing method is also known as Hybrid product costing system as materials costs are
accumulated by job order or batch wise but conversion costs i.e. labour and overheads costs
are accumulated by department, and process costing methods are used to assign these costs to
products. Moreover, under operation costing, conversion costs are applied to products using a
predetermined application rate. This predetermined rate is based on budgeted conversion
costs.
The two examples of industries are Ready made garments and Jewellery making.
Q-7 Answer any four of the following:
(a) DISCUSS the steps to be followed to exercise control over cost.
(b) DISTINGUISH between Bill of Materials and Material Requisition Note.
(c) LIST five financial expenses that causes differences in Financial and Cost Accounts.
(d) EXPLAIN standing charges and running charges in the case of transport organisations. LIST three
examples of both.
(e) DESCRIBE objectives of Budgetary Control System.
Ans. (a) To exercise control over cost, following steps are followed:
(i) Determination of pre-determined standard or results: Standard cost or performance targets for a
cost object or a cost centre is set before initiation of production or service activity. These are
desired cost or result that need to be achieved.
(ii) Measurement of actual performance: Actual cost or result of the cost object or cost centre is
measured. Performance should be measured in the same manner in which the targets are set i.e.
if the targets are set up operation-wise, and then the actual costs should also be collected and
measured operation-wise to have a common basis for comparison.

(iii) Comparison of actual performance with set standard or target: The actual performance so
measured is compared against the set standard and desired target. Any deviation (variance)
between the two is noted and reported to the appropriate person or authority.
(iv) Analysis of variance and action: The variance in results so noted are further analysed to know the
reasons for variance and appropriate action is taken to ensure compliance in future. If necessary,
the standards are further amended to take developments into account.
(b) Bill of Materials Material Requisition Note
1. It is the document prepared by the 1. It is prepared by the production or
engineering or planning department. other consuming department.
2. It is a complete schedule of component 2. It is a document authorizing Storekeeper
parts and raw materials required for a to issue materials to the consuming
particular job or work order. department.
3. It often serves the purpose of a material 3. It cannot replace a bill of materials.
requisition as it shows the complete
schedule of materials required for a
particular job i.e. it can replace material
requisition.
4. It can be used for the purpose of 4. It is useful in arriving historical cost only.
quotations.
5. It helps in keeping a quantitative control 5. It shows the material actually drawn
on materials drawn through material from stores.
requisition.
(c) Financial expenses causing differences in Financial and Cost Accounts:
(i) Interest on loans or bank mortgages.
(ii) Expenses and discounts on issue of shares, debentures etc.
(iii) Other capital losses i.e., loss by fire not covered by insurance etc.
(iv) Losses on the sales of fixed assets and investments.
(v) Goodwill written off.
(vi) Preliminary expenses written off.
(vii) Income tax, donations, subscriptions.
(viii) Expenses of the company’s share transfer office, if any.
(d) Standing Charges: These are the fixed costs that remain constant irrespective of the distance travelled.
These costs include the following-
- Insurance
- License fees
- Salary to Driver, Conductor, Cleaners, etc. if paid on monthly basis
- Garage costs, including garage rent
- Depreciation (if related to efflux of time)
- Taxes
- Administration expenses, etc.
Running Charges: These costs are generally associated with the distance travelled. These costs include
the following-

- Petrol and Diesel

- Lubricant oils,
- Wages to Driver, Conductor, Cleaners, etc. if it is related to operations
- Depreciation (if related to activity)
- Any other variable costs identified.
(e) Objectives of Budgetary Control System
1. Portraying with precision the overall aims of the business and determining targets of performance
for each section or department of the business.
2. Laying down the responsibilities of each of the executives and other personnel so that everyone
knows what is expected of him and how he will be judged. Budgetary control is one of the few
ways in which an objective assessment of executives or department is possible.
3. Providing a basis for the comparison of actual performance with the predetermined targets and
investigation of deviation, if any, of actual performance and expenses from the budgeted figures.
This naturally helps in adopting corrective measures.
4. Ensuring the best use of all available resources to maximise profit or production, subject to the
limiting factors. Since budgets cannot be properly drawn up without considering all aspects
usually there is good co-ordination when a system of budgetary control operates.
5. Co-ordinating the various activities of the business, and centralising control and yet enabling
management to decentralise responsibility and delegate authority in the overall interest of the
business.
6. Engendering a spirit of careful forethought, assessment of what is possible and an attempt at it.
It leads to dynamism without recklessness. Of course, much depends on the objectives of the
firm and the vigour of its management.
7. Providing a basis for revision of current and future policies.
8. Drawing up long range plans with a fair measure of accuracy.
9. Providing a yardstick against which actual results can be compared.
Q-8
(a) EXPLAIN the difference between controllable & uncontrollable costs?
(b) DEFINE cost plus contract? STATE its advantages.
(c) “Is reconciliation of cost accounts and financial accounts necessary in case of integrated accounting
system?” EXPLAIN.
(d) DISCUSS the impact of Information Technology in Cost Accounting.
Ans.
(a) Controllable costs and Uncontrollable costs: Cost that can be controlled, typically by a cost, profit or
investment centre manager is called controllable cost. Controllable costs incurred in a particular
responsibility centre can be influenced by the action of the executive heading that responsibility
centre.
Costs which cannot be influenced by the action of a specified member of an undertaking are known as
uncontrollable costs.
(b) Cost plus contract: Under cost plus contract, the contract price is ascertained by adding a percentage of
profit to the total cost of the work. Such types of contracts are entered into when it is not possible to
estimate the contract cost with reasonable accuracy due to unstable condition of material, labour
services etc.

Following are the advantages of cost plus contract:

(i) The contractor is assured of a fixed percentage of profit. There is no risk of incurring any loss on the
contract.
estimate.
(iii) Contractee can ensure himself about the ‘cost of contract’ as he is empowered to examine the
books and documents of the contractor to ascertain the veracity of the cost of contract.
(c) In integrated accounting system cost and financial accounts are kept in the same set of books. Such a
system will have to afford full information required for Costing as well as for Financial Accounts. In
other words, information and data should be recorded in such a way so as to enable the firm to ascertain
the cost (together with the necessary analysis) of each product, job, process, operation or any other
identifiable activity. It also ensures the ascertainment of marginal cost, variances, abnormal losses and
gains. In fact all information that management requires from a system of Costing for doing its work
properly is made available. The integrated accounts give full information in such a manner so that the
profit and loss account and the balance sheet can be prepared according to the requirements of law
and the management maintains full control over the liabilities and assets of its business.
Since, only one set of books are kept for both cost accounting and financial accounting purpose so
there is no necessity of reconciliation of cost and financial accounts.
(d) The impact of IT in cost accounting may include the following:
prepared in multiple copies, the related department can get e-copy from the system.
(iii) Information Technology with the help of internet (including intranet and extranet) helps in resource
procurement and mobilisation. For example, production department can get materials from the
stores without issuing material requisition note physically. Similarly, purchase orders can be
initiated to the suppliers with the help of extranet. This enables an entity to shift towards Just-in-
Time (JIT) approach of inventory management and production.
cost centre and cost object is codified and all related costs are assigned to the cost object or cost
centre. This process automates the cost accumulation and ascertainment process. The cost
information can be customised as per the requirement. For example, when an entity manufactures
or provide services, it can know information job-wise, batch-wise, process-wise, cost centre wise
etc.
closely to eliminate non-value-added activities.
The above are examples of few areas where Cost Accounting is done with the help of IT.

Q-9 Answer of the following:

(a) Briefly explain the ‘techniques of costing’.
(b) Narrate the terms ‘Joint Products’ and ‘By-Products’ with an example of each term.
(c) Discuss the steps involved in setting labour time standards.
(d) What is ‘Budgetary Control System’ and discuss the components of the same.
(e) Describe the difference between ‘Cost Control’ and ‘Cost Reduction’.
Answer
(a)
Techniques Description
Uniform Costing When a number of firms in an industry agree among themselves
to follow the same system of costing in detail, adopting common
terminology for various items and processes they are said to
follow a system of uniform costing.
Advantages of such a system are:
i. A comparison of the performance of each of the firms can be
made with that of another, or with the average performance in
the industry.
ii. Under such a system, it is also possible to determine the cost
of production of goods which is true for the industry as a whole.
It is found useful when tax-relief or protection is sought from
the Government.
Marginal Costing It is defined as the ascertainment of marginal cost by differentiating
between fixed and variable costs. It is used to ascertain effect of
changes in volume or type of output on profit.
Standard Costing and It is the name given to the technique whereby standard costs are
Variance Analysis pre-determined and subsequently compared with the recorded
actual costs. It is thus a technique of cost ascertainment and cost
control. This technique may be used in conjunction with any method
of costing. However, it is especially suitable where the
manufacturing method involves production of standardised goods
of repetitive nature.
Historical Costing It is the ascertainment of costs after they have been incurred.
This type of costing has limited utility.
• Post Costing: It means ascertainment of cost after production is
completed.
• Continuous costing: Cost is ascertained as soon as the job is
completed or even when the job is in progress.
Absorption Costing It is the practice of charging all costs, both variable and fixed to
operations, processes or products. This differs from marginal costing
where fixed costs are excluded.

Direct costing Direct costing is a specialized form of cost analysis that only uses
variable costs to make decisions. It does not consider fixed costs,
which are assumed to be associated with the time periods in which
they are incurred.
(b) (i) Joint Products - Joint products represent “two or more products separated in the course of the same
processing operation usually requiring further processing, each product being in such proportion that
no single product can be designated as a major product”.
In other words, two or more products of equal importance, produced, simultaneously from the same
process, with each having a significant relative sale value are known as joint products.
For example, in the oil industry, gasoline, fuel oil, lubricants, paraffin, coal tar, asphalt and kerosene
are all produced from crude petroleum. These are known as joint products.
(ii) By-Products - These are defined as “products recovered from material discarded in a main process, or
from the production of some major products, where the material value is to be considered at the time
of severance from the main product.” Thus, by-products emerge as a result of processing operation of
another product or they are produced from the scrap or waste of materials of a process. In short, a by-
product is a secondary or subsidiary product which emanates as a result of manufacture of the main
product.
The point at which they are separated from the main product or products is known as split-off point.
The expenses of processing are joint till the split –off point.
Examples of by-products are molasses in the manufacture of sugar, tar, ammonia and benzole obtained
on carbonisation of coal and glycerine obtained in the manufacture of soap.
(c) Procedure of Setting Labour Time Standards
The following are the steps involved in setting labour standards:
(a) Standardisation: Products to be produced are decided based on production plan and customer’s
order.
(b) Labour specification: Types of labour and labour time is specified. Labour time specification is
based on past records and it takes into account normal wastage of time.
(c) Standardisation of methods: Selection of proper machines to use proper sequence and method of
operations.
(d) Manufacturing layout: A plan of operation for each product listing the operations to be performed
is prepared.
(e) Time and motion study: It is conducted for selecting the best way of completing the job or motions
to be performed by workers and the standard time which an average worker will take for each job.
This also takes into account the learning efficiency and learning effect.
(f) Training and trial: Workers are trained to do the work and time spent at the time of trial run is
noted down.
(d) Budgetary Control System: It is the system of management control and accounting in which all the
operations are forecasted and planned in advance to the extent possible and the actual results
compared with the forecasted and planned results.
Components of Budgetary Control System: The policy of a business for a defined period is represented
by the master budget, the detailed components of which are given in a number of individual budgets
called functional budgets. These functional budgets are broadly grouped under the following heads:
1. Physical budgets: Those budgets which contain information in quantitative terms such as the
physical units of sales, production etc. This may include quantity of sales, quantity of production,
inventories, and manpower budgets are physical budgets.

2. Cost budgets: Budgets which provides cost information in respect of manufacturing, administration,
selling and distribution, etc. for example, manufacturing costs, selling costs, administration cost,
and research and development cost budgets are cost budgets.
3. Profit budgets: A budget which enables the ascertainment of profit. For example, sales budget,
profit and loss budget, etc.
4. Financial budgets: A budget which facilitates in ascertaining the financial position of a concern, for
example, cash budgets, capital expenditure budget, budgeted balance sheet etc.
Q-10 Difference between Cost Control and Cost Reduction
Ans.
1. Cost control aims at maintaining 1. Cost reduction is concerned with
the costs in accordance with the reducing costs. It challenges all standards
established standards. and endeavours to improvise them continuously
2. Cost control seeks to attain lowest 2. Cost reduction recognises no condition
possible cost under existing conditions. as permanent, since a change will result in lower
cost.
3. In case of cost control, emphasis 3. In case of cost reduction, it is on
is on past and present present and future.
system exists.
5. Cost control ends when targets are 5. Cost reduction has no visible end and
achieved. is a continuous process.
Q-11 BRIEF OUT advantages and disadvantages of Halsey Premium Plan.
Ans.
Advantages Disadvantages
1. Time rate is guaranteed while there is 1. Incentive is not so strong as
opportunity for increasing earnings by with piece rate system. In fact
increasing production. the harder the worker works,
the lesser he gets per piece.
2. The system is equitable in as much as the 2. The sharing principle may not
employer gets a direct return for his efforts be liked by employees.
in improving production methods and providing
better equipment.
Q-12 STATE the method of costing for the following industries:
(i) Sugar manufacturing
(ii) Bridge Construction
(iii) Advertising
(iv) Car Assembly

Ans.
S. No. Industry Method of costing
(i) Sugar manufacturing Process costing
(ii) Bridge Construction Contract Costing
(iii) Advertising Job costing
(iv) Car Assembly Multiple Costing (Combination of any method)
Q-13 STATE the unit of cost for the following service industries:
(i) Electricity Supply service
(ii) Hospital
(iii) Cinema
(iv) Hotels
Ans.
S. No. Service industry Unit of cost
(i) Electricity Supply service Kilowatt- hour (kWh)
(ii) Hospital Patient per day, room per day or per bed,
per operation etc.
(iii) Cinema Per ticket.
(iv) Hotels Guest Days or Room Days
Q-14 BRIEF OUT advantages of Integrated Accounts.
Ans. Advantages of Integrated Accounts are as follows:
(i) No need for Reconciliation- The question of reconciling costing profit and financial profit does not
arise, as there is only one figure of profit.
(ii) Less efforts- Due to use of one set of books, there is a significant saving in efforts made.
(iii) Less time consuming- No delay is caused in obtaining information as it is provided from books of
original entry.
(iv) Economical process- It is economical also as it is based on the concept of “Centralisation of
Accounting function”.
Q-15 BRIEF OUT difference between Fixed and Flexible Budget.
Ans.
S. No. Fixed Budget Flexible Budget
1. It does not change with actual volume of It can be re-casted on the basis of
activity achieved. Thus it is known as rigid activity level to be achieved. Thus it
or inflexible budget. is not rigid.
2. It operates on one level of activity and under It consists of various budgets for
one set of conditions. It assumes that there different levels of activity.
will be no change in the prevailing conditions,
which is unrealistic.
3. Here as all costs like - fixed, variable and Here analysis of variance provides
semi-variable are related to only one level useful information as each cost is
of activity so variance analysis does not analysed according to its behaviour.
give useful information.

4. If the budgeted and actual activity levels Flexible budgeting at different levels of
differ significantly, then the aspects like activity facilitates the ascertainment of cost,
cost ascertainment and price fixation do not fixation of selling price and tendering
give a correct picture. of quotations.
5. Comparison of actual performance with It provides a meaningful basis of
budgeted targets will be meaningless specially comparison of the actual performance with
when there is a difference between the the budgeted targets.
two activity levels.
Q-16 DISTINGUISH clearly between Bin cards and Stores Ledger.
Ans.
Bin Card Stores Ledger
It is maintained by the storekeeper in the store. It is maintained in cost accounting department.
It contains only quantitative details of
material received, issued and returned to stores. It contains information both in quantity and value.
Entries are made when transaction takes place. It is always posted after the transaction.
Each transaction is individually posted. Transactions may be summarized and then posted.
Inter-department transfers do not appear
in Bin Card. Material transfers from one job to another job are
recorded for costing purposes.
Q-17 Some of the items of PR Company, a manufacturer of corporate office furniture, are provided below. As
the company is in the process of developing a formal cost accounting system, you are required to
CLASSIFY the items into three categories namely: (i) Cost tracing (ii) Cost allocation (iii) Non-
manufacturing item.
Carpenter wages, Depreciation - office building, Glue for assembly, Lathe department supervisor, Metal
brackets for drawers, Factory washroom supplies, Lumber, Samples for trade shows, Lathe depreciation,
Lathe operator wages.
Ans.
Item Cost Tracing Cost Allocation Non-manufacturing
Carpenter wages 
Depreciation - office building 
Glue for assembly 
Lathe department supervisor 
Metal brackets for drawers 
Factory washroom supplies 
Lumber 
Samples for trade shows 
Lathe depreciation 
Lathe operator wages 

Q-18 In Batch Costing, STATE how is Economic Batch Quantity determined?

Ans. The economic batch size or Economic Batch Quantity may be determined by calculating the total cost
for a series of possible batch sizes and checking which batch size gives the minimum cost. The objective
here being to determine the production lot (Batch size) that optimizes on both set up and inventory
holding cots formula. The mathematical formula usually used for its determination is as follows:
Where,
D = Annual demand for the product
S =Setting up cost per batch
C=Carrying cost per unit of production
Q-19 EXPLAIN what are the essential pre-requisites of Integrated accounting system?
Ans. Essential pre-requisites for Integrated Accounts: The essential pre-requisites for integrated accounts
include the following steps-
1. The management’s decision about the extent of integra tion of the two sets of books. Some
concerns find it useful to integrate up to the stage of prime cost or factory cost while other prefers
full integration of the entire accounting records.
2. A suitable coding system must be made available so as to serve the accounting purposes of financial
and cost accounts.
3. An agreed routine, with regard to the treatment of provision for accruals, prepaid expenses, other
adjustment necessary for preparation of interim accounts.
4. Perfect coordination should exist between the staff responsible for the financial and cost aspects
of the accounts and an efficient processing of accounting documents should be ensured.
Q-20 WHAT is inter-process profit? STATE its advantages and disadvantages.
Ans.
Inter-Process Profit: To control cost and to measure performance, different processes within an organization
are designated as separate profit centres. In this type of organizational structure, the output of one process
is transferred to the next process not at cost but at market value or cost plus a percentage of profit. The
difference between cost and the transfer price is known as inter - process profits.
The advantages and disadvantages of using inter-process profit, in the case of process type industries are as
follows:
Advantages:
1. Comparison between the cost of output and its market price at the stage of completion is facilitated.
2. Each process is made to stand by itself as to the profitability.
Disadvantages:
1. The use of inter-process profits involves complication.
2. The system shows profits which are not realised because of stock not sold out.
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1. INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING .......................... 1-10

2. MATERIAL COST .............................................................................................. 11-56

3. EMPLOYEE COST AND DIRECT EXPENSES .......................................................... 57-90

4. OVERHEADS-ABSORPTION COSTING METHOD ................................................. 91-134

5. ACTIVITY BASED COSTING ............................................................................. 135-180

6. COST SHEET ................................................................................................... 181-221

7. COST ACCOUNTING SYSTEM ........................................................................... 222-260

8. UNIT & BATCH COSTING ............................................................................... 261-270

9. JOB COSTING AND CONTRACT COSTING ........................................................ 271-310

10. PROCESS & OPERATION COSTING ................................................................... 311-364

11. JOINT PRODUCT AND BY PRODUCT .................................................................. 365-384

12. SERVICE COSTING ........................................................................................... 385-422

13. STANDARD COSTING ....................................................................................... 423-462

14. MARGINAL COSTING ....................................................................................... 463-504

15. BUDGET & BUDGETARY CONTROL ................................................................... 505-540

16. MISCELLANEOUS TOPICS ................................................................................ 541-557

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Q-1 Mention the Cost Unit of the following Industries :

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2. Cost control seeks to attainlowest 2. Cost reduction recognises no conditionas

-2- Chapter-1 : Introduction to Cost & Management Accounting

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Q-6 Explain the difference between controllable & uncontrollable costs?

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-4- Chapter-1 : Introduction to Cost & Management Accounting

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Ans. Difference between Cost Accounting and Management Accounting

-6- Chapter-1 : Introduction to Cost & Management Accounting

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Q-15 HOW do you deal with the following in cost accounts?

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Q-19 Differentiate between “Marginal and Absorption Costing”.

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Cost classification based on controllability

-10- Chapter-1 : Introduction to Cost & Management Accounting

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-12- Chapter-2 : Material Cost

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(vi) Inventory Turnover Ratio

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2 × Annual Requirement Order cost

-14- Chapter-2 : Material Cost

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(ii) Computation of Economic Order Quantity (EOQ):

2 x 17,200 kg.  ` 720 2 x 17,200 kg.  ` 720

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Q-4 Define Inventory Control and give its objectives.

By Setting On the basis Using Ratio Physical Control

-16- Chapter-2 : Material Cost

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iC1 = Inventory carrying cost per unit per annum

2AO 2  96,000 units  `1,000

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2A O 2 × (60,000 packs x 12 months) x `240

(iii) Ordering and storage costs

(c) Time interval for placing next order

-18- Chapter-2 : Material Cost

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